Is it better to invest early on?

There’s nothing like a deadline to spur us into action. It’s why so many investors find themselves opening ISAs in the final few days of each tax year, just before 5 April.

But there are also investors who do things a bit differently, opening their ISAs in the first few days of each tax year – on 6 April or just after.

These early birds may not be as big a flock as last-minute ISA investors. But their strategy has proved to be a winning one over the long term.

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What does the maths tell us?

We ran some numbers based on investing £1,000 in a typical global fund every year since ISAs began in 1999.

If you’d diligently invested on the first day of each tax year, you would now have £3,050 more than someone who had invested on the last day of every tax year. That’s despite putting in exactly the same amount: £23,000.

Last-minute ISA investors would have turned that £23,000 into £62,240, while early birds would now be sitting on £65,290.

The reason for this loftier return? Early birds invest their money for that bit longer. Markets, of course, go up and down, but they generally rise more than they fall. Since 1999, the global stock market has risen in 15 out of 23 tax years. So around two-thirds of the time you would have bought in at a lower price by investing at the start of the tax year, rather than waiting until the end. And that translates into better returns for your ISA.

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Compounding

One of the benefits of investing early is it allows you to build your pot through compounding. Compound interest is the cumulative interest your savings and investments can build up over time, so the return is applied not just to the initial amount you save, but any returns you also reinvest.

In the long run, this increases the amount your original investment returns (assuming the rate of return is positive).

Investing every month

There’s another popular way to invest in your ISA: doing it monthly.

If you’d invested £1,000 into your ISA every year since 1999 – but split into monthly instalments – you would have turned your £23,000 overall investment into £64,100 today. That’s a bit less than an early bird, but £1,860 ahead of a last-minute ISA investor.

Again, the same principle is at play. Drip-feeding your money means it’s in the market longer than if you wait to invest all of it on 5 April – giving it longer to grow. And there’s another advantage to investing regularly. Because your money is transferred from your bank account automatically each month, it’s hassle-free and takes the emotion out of investing. So, it can be a simple and smart way to invest.

Of course, whether you’re a regular saver, an early bird or a last-minute ISA investor, you’re still streets ahead of someone who isn’t contributing to an ISA at all. But if you want to make your money go even further, history shows us that more often than not, it’s the early bird that catches the juiciest worm.

Example: £1,000 invested in an ISA each year since 1999

Sources: AJ Bell, FE, Morningstar, total return of IA Global Sector Average in GBP to 16th March 2022

Methodology: current value of a £1,000 annual ISA contribution made since 1999 on the first day of each tax year (early birds), on the last day (last-minute ISA investors), or spread across 12 regular monthly payments of £83.33 each year (regular savers).

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An AJ Bell Stocks and shares ISA is an easy, efficient and tax-free way to invest - so more of what you make stays in your pocket.

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