Little by little

By TONY HAZELL FOR THE DAILY MAIL
Updated: 19:00 EST, 24 October 2001

WHEN the stock market is jumping around like a yoyo, the temptation is to close your eyes and turn your back. That would almost certainly be a mistake because when the market goes up, it can move very rapidly and you would miss the chance to make some money.

The best approach for small investors is regular monthly saving into unit trusts or similar funds which combine the money of many savers to invest in a wide range of shares or bonds. This strategy carries less risk than investing in a single company's shares.

You can buy the fund within an Individual Savings Account (Isa) wrapper which gives tax perks to increase further the potential of long-term growth. This imposes discipline because you really do invest money rather than just thinking about it, and you will be buying at the average price throughout the year which makes erratic price movements less of a worry.

Regular saving also avoids the question of trying to time your investment. Most lump sum investors dither through the year and eventually pile their money into the market in February and March to beat the Isa deadline at the end of the tax year. If they miss this deadline they lose the chance to invest up to £7,000 in an Isa and benefit from tax-favoured growth.

The question is whether regular saving delivers better results. The answer is that it depends on when you invest lump sums. If you put in a lump sum towards the end of the tax year, then you would have done better with regular saving.

We compared how a £6,000 investment would have fared over the past five years if it was drip-fed at £100 a month against putting in £1,200 lump sums towards the end of the tax year. Financial adviser Chase de Vere ran the figures and says the regular saver would win over the lump sum investor.

There are important considerations when you are saving monthly into an Isa. First, you must review your investment every March and decide whether you wish to continue with the same Isa for the following tax year (6 April to 5 April).

If you want a balanced portfolio, you should consider changing every year to build a mix of international, UK, US, European and other funds. There are more than two million regular savings plans into investment funds.

Fidelity executive director Ann Davis says: 'We write to people once or twice a year advising that they look at their investment and check it is still meeting their aims.'

The most important message for regular savers is to stick with it. Otherwise, you lose the benefit of buying when the the market is at its cheapest.

Anne McMeehan, spokesman for the Association of Unit Trusts and Investment Funds, says: 'Regular saving is particularly important when the market is volatile. When prices have fallen, you will be buying more for your money.'

Invesco Perpetual spokesman Mike Webb says: 'You should not close down a savings plan when markets are volatile. This is the time to stick with it.'

•: ANDREA and Ryan Mohan both save every month into investment funds in a taxfree Individual Savings Account. Andrea, 29, saves £150 a month into Fidelity Moneybuilder UK index which follows the fortunes of the FTSE All Share index covering all the companies listed on the stock market.

Ryan, 33, saves £150 a month into Moneybuilder Growth which invests in a mix of shares chosen by an expert fund manager. The couple from London (pictured with daughter Emily, two) are saving for the medium to long term. Ryan says:'We had a high interest account but decided we might do better in the long term investing in the stock market. We are about 20% down on the money we have invested so far, but are considering increasing the amount we save to recover the money.'