We’re often asked: Is it better to invest a big lump sum of money all at once, or to drip-feed your cash into the market?

And there happens to be an easy answer…

Statistically you’re more likely to boost your returns by going all in at once.

A Vanguard paper titled Dollar-cost Averaging Just Means Taking Risk Later found that lump sum investing beat drip-feeding around two-thirds of the time in the UK and US.

This was true across multiple decades and asset allocations – because more often than not equities and bonds trump the returns from cash.

Here’s a snapshot of Vanguard’s findings:

Many other studies have shown the same thing.

The logic is simple. Equities beat cash. Bonds beat cash. (Eventually!)

Equities and bonds are riskier asset classes than cash and investors can expect to be rewarded for bearing that risk. Historically this has come to pass. Over most time periods your investments will therefore beat your bank account.

So the sooner your money is cast into the market, the more likely it is to benefit from the greater potential of equities and bonds to grow.

Indeed, the longer you spend drip-feeding (or pound-cost averaging ((Or dollar-cost averaging as our US chums would have it))), the more likely it is that you will pay for your caution as your cash returns are outshone by the fizzing fireworks of equities.

Yes but, no but…

Wait – what about that one third of the time when drip-feeding wins?

Well, you’ll be glad you chose to drip-feed if the market relentlessly falls over the course of your 12 easy installments. This way every time you buy a punnet of equities, you’re buying them at a cheaper rate than the last time.

You’ll also be glad if, in a parallel universe, you’d have been that shell-shocked investor who threw in your whole £200,000 lot at once and then watched it shrink in a bear market crash like Lake Chad in the face of a population explosion.

So the real question is not about returns. It is could you handle it if luck was against you and your inheritance or bonus or compensation payout – your one life-changing windfall – got vaporised by 50% in a matter of months?

It’s monkey in the mirror time again and drip-feed investing works because it helps prevent that person from going nuts.

I’ve been there

Many first-time investors hang around the edge of the investing pool, unable to dive in.

I know I did.

I couldn’t bear the thought of watching my maiden punt lose – even though my rational brain knew that it didn’t matter because I was committed to investing for the long term.

Every piece of bad news heightened my dithering because, well, if I waited a bit longer then maybe I could buy a little cheaper… but really I just didn’t want to see my money tank.

It was an inauspicious start for a guy who doesn’t believe you can time the markets.

Market timing is not your friend

It’s precisely because we can’t predict the markets that drip-feeding is a useful psychological tool.

We can gather all the opinions we like, check out the P/E ratios and fret about geopolitics, but that kind of rune-reading is little better than superstition. It might salve a troubled mind but it makes no difference to the outcome – which is decided by a game of chance.

Drip-feeding breaks the brain-jam because it promises to cushion risk averse investors against the (less likely) downside.

If the market moves against us early on, then at least we’re not fully exposed, and later drips will buy more shares at a cheaper price.

So drip-feeding (aka pound-cost averaging) is useful, but it’s useful as a psychological crutch, not because it’s likely to boost returns. It isn’t.

If you think drip-feeding is the best way forward for you, there are various methods to try. You might consider investing equal installments over:

• 12 months (never longer according to maths professor Bill Jones)
• Six months
• Four quarters

Or else put in half now and half over the next six months.

Passive investing writer Rick Ferri also has some interesting ideas on drip-feeding techniques, including favouring pound-cost averaging if your cash heap is worth more than 20% of your current wealth.

Your bottom line

Remember, the potential difference in outcomes between lump sum investing and pound-cost averaging is the performance of the market versus cash over your drip-feeding period.

We saw that according to Vanguard’s paper, the lump sum approach wins two times out of three.

But by how much? Well:

In the United States, 12-month dollar cost averaging led to an average ending portfolio value of $2,395,824, while lump sum investing led to an average ending value of $2,450,264, or 2.3% more.

The results were similar in the United Kingdom and Australia: UK investors [who chose lump sum investing] would have ended with 2.2% more and Australian investors with 1.3% more, on average.

Personally, if I doubted my risk tolerance then I’d choose the technique that was more likely to keep me in the game, rather than stretch for 2.2% upside.

That’s because the worst outcome is panicking in the face of a bear market, selling at the bottom, and then being scared off investing for life.

Take it steady,

The Accumulator

P.S. Remember this question has nothing to do with pound cost averaging from a regular income like your monthly salary. That’s just an accident of circumstance. Your money arrives as a series of monthly lump sums, and you’ll buy more equities on the dips and less on the highs. But, as market timing is not consistently possible, you’re best off investing it as soon as you can.

Fans of Vanguard (Vanfans? Guardinstas? Fanguards?) have waited years for the fund giant to launch its own low-cost SIPP for UK investors.

The Vanguard Personal Pension was originally expected shortly after the company’s direct investment platform hit the UK in May 2017.

However the SIPP launch was delayed several times, for undisclosed reasons.

It’s understandable the US-headquartered company wanted to get its British tax and pension law exactly right – no easy matter – never mind fine-tuning the business sums. But you do wonder if the delays have caused some diehard Vanfans to delay pension contributions for longer than they would have?

Regardless, the end is in sight. Like a child on an interminable holiday trip to Wales who finally spots the uprights of the Severn Bridge, we’re not there yet – the SIPP won’t arrive until 2020 – but we can now see where we’re going.

To summarise from Vanguard’s latest update:

• Vanguard’s SIPP will launch in ‘early 2020’; pension withdrawals will not be possible until 2021.

• The account fee will be 0.15%.

• There will be a cap of £375.

• That cap will apply across all holdings in one name on Vanguard’s direct platform, except JISAs (so your SIPP, ISA, and general accounts).

• You can invest from £100 a month, or lump sums of £500 or more.

• The SIPP will offer 76 funds and ETFs, all from Vanguard.

• There will be no fees for SIPP set-up, contributions, transfers in or exits, dealing in funds, reinvesting income, valuation statements, account closure, death processing, or divorce.

• Restricted ‘bulk’ ETF dealing will be free, but if you want to trade ‘live’ you’ll pay £7.50 a pop.

• There will be the usual annual fund costs docked from your returns. You’ll also be on the hook for internal fund transaction costs, as is standard with funds.

Vanguard offers the following comparison on the cost of investing £40,000 into a Vanguard Target Retirement Fund with its platform, compared to investing with the SIPPs of 14 rival platforms:

Obviously we’re quoting numbers straight from the company here, not our own sums. It looks very competitive for contributions so far though.

As for drawdown mode, Vanguard says:

The Vanguard Personal Pension will also be competitive for investors who want to enter drawdown over the age of 55, once this option is available in the 2020-21 tax year.

Simply put, there will be no additional charges for going into drawdown in the Vanguard Personal Pension. […]

[Research company] Platforum ran the numbers for an investor with a £210,000 sum ((Cited as the median pension in payment for a 65-69 year old.)) in a Vanguard Target Retirement Fund, looking to draw down 4% a year, after fees and charges, for 10 years.

Investors using the Vanguard Personal Pension in this scenario would have £3,975 more remaining in their pot compared with the highest cost SIPP in the market, having saved £5,089 in fees to withdraw the same amount of money.

We stan Vanguard

While we’re proudly independent here at Monevator, our focus on simple, low-cost investing and broad index tracker funds makes it hard not to come across as raving Guardinistas when it comes to most of Vanguard’s products.

The Vanguard Personal Pension isn’t going to buck that trend.

We’ll reserve our final judgement – and filling in the blank spot on our comparison table – until the rubber meets the road next year. But this does look like being an instant table-topper among the ‘percentage fee charging’ SIPP platforms.

My co-blogger The Accumulator points out the Vanguard SIPP should be particularly welcomed by younger or newer investors with smaller pots, as the low charges will extend the threshold at which you’d even need to consider switching to a flat-fee offering. And then there’s the fee cap to factor in, too.

Investing commission-free in ETFs also sounds splendiferous, provided you can cope with the bulk-dealing times Vanguard offers – and as a passive investor, why wouldn’t you?

That said, it’s not perfect; it only offers Vanguard products.

While in practice this will give nearly everyone all the choice they need to construct a low-cost passive retirement portfolio, it’s not amazing from the perspective of diversifying against the (extremely remote) possibility of some sort of systemic company or platform failure.

Vanguard is one of the biggest asset managers in the world and a SNAFU that caused some sort of permanent hit to your capital is pretty unthinkable. But we’re a paranoid lot around here.

A slightly more likely (though still very unlikely) issue would be something like delayed access to your money in a Financial Crisis 2.0. At least by diversifying between platform provider and funds you potentially have a bit more cover.

Of course you can always get around this by running two SIPPs – one with Vanguard and another with a third-party and non-Vanguard funds. And having all your money on any single platform from any company gives you a single point of failure risk.

Will you be in the vanguard?

There’s no rush to decide exactly what to do.

For one thing, the Vanguard Personal Pension is probably still a few months away. Plenty of time to think.

Moreover, your existing platform may well decide to cuts costs ahead of this launch.

In the very long-term it’s going to be hard for most rivals to compete with Vanguard on costs alone, just because of the economy of scale advantage enjoyed by the industry’s megalodon.

Competitors may choose instead to trumpet choice or other variables. Still, the collapse in share dealing commission in the US recently gives a good example of how quickly costs can fall if everyone gets religion.

What caught my eye this week.

A regular listener to the ThisIsMoney podcast, I’ve been waiting for Simon Lambert and his team to get stuck into the election manifestos for three reasons.

First, they’ve been trailing it for weeks and they were clearly ready to go.

Second, I am as curious as any other concerned citizen / consumer / tax-payer / wage slave.

But most importantly, I said I wasn’t going to opine about this election. I wanted to give myself – and Monevator – a break from politics.

Well, I’m half back-pedaling that today. (Hey, that’s politics.) It keeps coming up in the Weekend Reading comments, and, well, it’s obviously something of a big deal.

But I’m still not going to write about it… because ThisIsMoney and the Financial Times have done the job for us:

• The general election and your finances [Search result] – FT

• What the general election means for your money – ThisIsMoney

Both papers do deep non-partisan dives into the various manifestos. Read them and you’ll quickly get up-to-speed on the personal finance angle of the general election. For me that’s a sideshow with this vote anyway; your view may vary.

What’s that? You want some spice?

Well ThisIsMoney editor Simon Lambert takes on the strange anomalies on the tax bands that produce very high marginal rates:

Labour plans a new 50 per cent ‘super rich rate’ of income tax above £125,000 but high earners will have to pay an even higher rate of 67 per cent before they get there.

A combination of the 45p tax rate threshold dropping to £80,000 and the removal of the personal allowance means that those earning £100,000 to £125,000 would effectively pay 67p in income tax for every extra pound they earn.

Despite outlining a radical revamp of income tax, Labour confirmed to This is Money that it would not remove the quirk in the tax system that sees the marginal rate of tax rocket for those lucky enough to see their earnings go above £100,000. […]

An income tax system where the marginal rate goes 20 per cent, 40 per cent, 60 per cent, 40 per cent, 45 per cent is clearly daft.

Clarifying and simplifying the tax system shouldn’t be controversial, but back in the real world it’s radioactive. Labour told Simon they have no plans to change the system, while the Conservatives didn’t even bother to give (or risk?) a reply.

Meanwhile over at the FT the still mostly wonderful (Brexit cheer-leading!) Merryn Somerset-Webb notes that before we soak the rich, we need to figure out who they are.

Yes, Merryn has plenty of sympathy for the devil – aka £80,000-man:

In fact, his take home earnings are not as much higher than the average as a first glance suggests.

The top quintile of earners in the UK are on an average of about £88,000.

The bottom quintile are on more like £7,900. Add in tax and benefits, and those numbers fall to about £65,500 and rise to £19,000.

That means the top fifth take home, on average, 3.4 times as much as the bottom fifth. That’s significant, but much less significant than the 11-fold difference in pre-tax pay.

It’s a point well-made. With that said, as I wrote a half-a-dozen times last week, I’ve no problem with anyone advancing the argument that he’s taxed enough already.

My despair was over his Blimp-ish reality distortion field. I think it was a man earning £80,000 shouting “liar!” at an MP while claiming he was in the bottom 50% of earners on his £80K that set people off, not the technicalities of wealth distribution.

This is the Weekend Reading to debate the financial aspects of the election, if you’re so-minded. But please keep it civil and as constructive as possible, and ideally focused on personal finance. Have a great weekend!

[continue reading…]