Lump sum vs regular investing: which is best for this tax year?

interactive investor considers strategies.

• Regularly investing trumped lump sum investing over the past year when linking performance to the FTSE World index.
• But over the long term, lump sum investing has been the most lucrative strategy.

‘Which is better, lump sum or regular monthly investing?’ That’s the burning question likely to be on the minds of many investors on the eve of the £20,000 ISA allowance being reset (6 April), as stock markets remain volatile amid pressures stemming from red-hot inflation and high interest rates. 

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interactive investor, the UK’s second-largest investment platform for private investors, has compared regular monthly investments with equivalent amounts invested as a lump sum. Looking at the FTSE World as an illustration, these past performance figures are no guide to the future, but they do help highlight trends around lump sum and regular investing. 

A regular monthly investment of £50 in a fund replicating the performance of the FTSE World over the year to 31 March 2023, excluding charges, would have generated a total return of £617 on a total contribution of £600. Whereas a lump sum investment of £600 over the same time frame would have shrunk a little, returning £596 by the end of March.

Over longer periods, lump sum investing was the more lucrative strategy. Again, looking the performance of the FTSE World, the lump sum investment of £1,800 would have turned into £2,874 over three years, compare to £2,035 if the lump sum was split equally into monthly investments (£50 per month instalments).

Over the past five years, a £3,000 lump sum investment would have grown into £5,003 compared to £3,809 under the regular investing strategy – the equivalent amount drip fed in £50 per month instalments. Over 10 years, a lump sum investment of £6,000 would have produced a total return of £17,436, versus £10,625 if the equivalent amount was drip fed in the market in £50 per month regular instalments.

Lump sum vs regular investing linked to FTSE World performance

Source: interactive investor/Morningstar Direct - Total returns (GBP) to 31/03/2023 of FTSE World GBP. Initial Investment of £50 on 31/03 and subsequent £50 per month invested on 1st of each month.

Past performance is no guild to the future, and you may not get back the full amount invested.

Commenting, Myron Jobson, Senior Personal Finance Analyst, interactive investor, says: “Our analysis shows that the regular investment strategy has trumped lump sum investing over the past year in which stock markets have been plagued by pressures arising from runaway inflation, rising interest rates and, latterly, the Silicon Valley Bank debacle. But over the long term, lump sum investing has been the most lucrative strategy hands down – not least because your investment is being put to work for longer.

“Over 10 years, a period which includes the record bull run that followed the financial crisis, the lump sum strategy would have returned almost £7,000 more than the regular investing approach if linked to the performance of the FTSE World over the period.

“This suggests that the ‘lump sum versus regular investing’ debate hinges on market conditions when you invest your money. Regular investing can ease the effects of downward share price movements, but it also limits gains in a booming market. But it does help you sleep at night and is the ultimate get-rich-slow strategy.

“The stark reality is that many of us won’t have the means to invest a lump sum in one go, especially amid the cost-of-living squeeze. But if you have some spare cash every month, doing so can still generate a handsome return over the long term.

“Monthly direct debits from your current account into a regular saving scheme are a practical, painless and hassle-free way to get into an investing habit – and you can buy funds, ETFs, investment trusts and popular UK shares for free on ii if you invest monthly. Remember, mighty oaks from tiny acorns grow – many small contributions can build into a sizeable pot. Doing so can also help take emotions out of investing, while mitigating investment risk and smooth out the inevitable bumps in the market, buying fewer shares when prices are high and more when prices are low. In doing so, it takes away at least some of the risk of market timing.

“The key takeaway is there is no one perfect way to invest cash every time. Time in the market, not timing the market is what’s crucial. So, whether you are lucky enough to have a lump sum, or invest on a monthly basis, investing something is likely to be beneficial to your long-term wealth over the long term.”