How a regular savings plan dampens stock market volatility

Simplicity is a virtue when you first start investing, which is why setting up a regular savings plan can take some of the load off the decisions you have to make. 

Money is automatically moved from your bank account to your ISA, SIPP or Dealing account every month, and then invested according to the standing instructions you gave when you set up the plan. You can change those investment instructions at any time too. Alternatively with our Ready-made pension any money you put in is automatically invested.

How making regular contributions can take the stress out investing

Regular savings plans offer investors a low maintenance way of building up a nest egg while helping you maintain the required discipline to keep your investment pot topped up every month. If you hope to invest what’s left in your current account at the end of the year instead, you may struggle to find two pennies to rub together. It’s unbelievably difficult not to spend money that’s so accessible.

A regular investment plan also helps to temper stock market volatility, because it leads to a smoother ride than lump sum investing. That can help set your nerves at rest if you’re new to investing and cautious about losing money. There is still risk with a regular investment plan, but it’s muted compared to lump sum investing.

For example, the dotcom bust at the beginning of the millennium was a horrendous period to be invested in the stock market. A £6,000 investment in the FTSE 100 would have fallen to less than £3,500 by the time the market bottomed out at the beginning of 2003. It would then have gone on to recover somewhat, but even by the beginning of 2005 it would only be worth just over £4,800 (source: Morningstar). So, after five years, investors would still be nursing losses.

How investing regularly can protect investors from volatility 

This is an extreme example, because the beginning of 2000 was one of the worst times in living memory to invest a lump sum in the stock market. But if you had started a regular investment plan instead, you could be forgiven for not noticing the market meltdown. That’s because fresh funds are going into the market every month, and as they do, they boost the value of your pot. And if the market keeps falling, the money you invest buys in at lower and lower prices. The chart below shows a £100 monthly investment into the FTSE 100 over five years from the beginning of 2000 to the beginning of 2005. The journey is remarkably smooth, despite the market turmoil.

This is a stark example in a falling market. In rising markets, a lump sum investment would be expected to perform better than regular savings, but still with greater volatility. It’s also the case that the longer a regular savings plan goes on, the more sensitive it becomes to market corrections.

That’s because the weight of money already built up in the stock market is larger compared to the fresh contributions going in. But a regular savings plan can still help to dampen the effects of market volatility, and it’s highly effective at doing so if you’re beginning to build up your investment portfolio.