Spear (pictured), managing director of Spear Financial, describes drip-feeding as a "hobby-horse" of his, saying that it allows risk-averse investors to put their money into a more aggressive product without the prospect of sending them running to their computer every time the stock market wobbles. "I love drip-feeding. I honestly believe it works over the long-term – and it does, it absolutely works," he said.
"Even if you invested in something like a Japan smaller companies fund, over the long-term, using drip-feeding would absolutely let you clean up."
Spear says drip-feeding, which means putting small amounts into the stock market at regular intervals, is especially relevant at the moment given what looks like a mini-slump in equity markets, and rising bond yields, which could mean cautious investors find themselves out of pocket.
"In the short-term, a lot of people would go for low-risk funds, but because of what is happening to fixed interest, there is a strong chance that even the lowest-risk funds could lose money," he explained.
"People would do well to put aside all their emotions at the moment and put some money into the stock market, because it’s all to do with timing. At 6,800 it wouldn’t be a good time to put a lump sum into the stock market, but at 6,000 it probably is. The beauty of drip-feeding is that it does all this for you."
Spear says it can be difficult to convince clients with a long-term horizon the benefits of taking on more risk, but adds that if they indicate they are happy to use a drip-feeding strategy, the task becomes a lot easier.
He explains the funds he would recommend to a cautious client who insisted on investing a lump sum would be different to those he would offer someone with a similar risk profile but who was willing to invest their money at regular intervals.
"If I was going to recommend a fund for a cautious investor with a bit of money, I would go for something like Fidelity Multi-Asset Income."
"If the same cautious investor came to me and said they would be willing to drip-feed their money in, I would recommend something like Newton Managed, which is a pure equities play that invests across a diverse range of areas."
"Another one is AXA Framlington Managed Balanced. It is a cracking fund of funds, although it does annoy me with charges sometimes. There would also be no harm in investing in a tracker, like one from Vanguard, although their minimum investments can be a bit high."
Fidelity Multi-Asset Income was launched in April 2007, just before the financial crisis hit, making comparisons against a strategy that aims to take advantage of market volatility especially pertinent.
Since then, it is up 30.4 per cent, compared with 30.02 per cent from AXA Framlington Managed Balanced and 18.37 per cent from Newton Managed.
Performance of funds since April 2007
Source: FE Analytics
Although there is little difference between the returns of the Fidelity and AXA funds, the latter’s volatility of 15.03 per cent is more than double that of the former’s, making it less palatable for a cautious investor.
If the money – say £100 a month – was drip-fed into the three funds instead of invested as a lump sum at the start of the period, a different picture emerges. The two more adventurous funds, AXA Framlington Managed Balanced and Newton Managed, come out on top, turning the total £7,300 investment into £10,110.51 and £9,617.15 respectively, or 38.5 and 31.74 per cent.
Performance of £100 a month drip-fed into markets since Apr 2007
Source: FE Analytics
Both figures are higher than what investing a lump sum of £7,300 in the more cautious Fidelity fund at the start of the period would have delivered – £9,527.6. Using this method AXA Framlington Managed Balanced and Newton Managed would have turned the £7,300 into £9,491.38 and £8,641.2, respectively.
Just as important for a cautious investor is the smoothness of returns achieved by drip-feeding – as seen in the graph above.
As Spear pointed out, drip-feeding should be used as part of a long-term strategy. However, numerous studies have shown that over lengthy timeframes, it is almost always better to invest a lump sum at the beginning of the period rather than drip-feeding the money in.
For example, putting £100 a month into the two funds with a long enough track record over the course of a decade would have turned the £12,000 total investment into £19,118.14 for AXA Framlington Managed Balanced and £17,610.9 for Newton Managed.
If £12,000 was invested as a lump sum at the beginning of the period, it would have grown into £30,165.75 in the case of the AXA fund and £25,368.79 for the Newton one.
Performance of £100 drip-fed into funds and sector over 10yrs
Source: FE Analytics
However, using the IMA Mixed Investment 0%-35% Shares sector in place of Fidelity Multi-Asset Income, the results appear to support Spear’s point.
A cautious investor who put the £12,000 lump sum into the sector a decade ago would have seen their money grow to £17,432.68, which is less than they would have made if they had drip-fed their money into either of the more adventurous funds.
Performance of £12,000 invested in funds and sector over 10yrs
Source: FE Analytics
Although the difference in returns between the Newton fund and the IMA Mixed Investment 0%-35% Shares sector is marginal, it is worth pointing out that 10 years ago markets were at extremely depressed levels following the bursting of the dotcom bubble and the invasion of Iraq, which is the optimum time for investing a lump sum.
