A guide to drip-feed investing

Pre-retirement

Drip-feed investing offers a simple way to begin building your wealth through an investment, without having to contribute a large amount upfront. But how does it work, and how can it help you to save towards your retirement?

What is drip-feed investing?

Drip-feed investing involves regularly ‘drip feeding’ money into an investment, such as a stocks and shares ISA, rather than in one lump sum.

Making small, regular contributions allows you to buy into a fund at different prices throughout the term of your investment. This is due to the way markets can fluctuate over time.

Eventually, you will have paid an average price per unit – which is where the term ‘pound cost averaging’ comes from.

What are the benefits of investing little and often?

Taking a drip-feed approach offers several benefits. Firstly, you don’t need a large sum of money to get started. In fact, investing small amounts over a longer period is key to this approach.

Say a lump sum investor contributes all their intended investment in one month, but you invest the same amount spread over the following 12 months. The lump sum investor will buy all their units at the same price, whereas your units will be bought at different prices throughout the year.

Your investment drip-fed over 12 months may, depending on market fluctuations in the price per unit, leave you with more units than the other investor.

Regularly putting in small amounts leaves you less exposed to market volatility. If the market took a downturn the month after making a lump sum investment, you would lose a significant chunk of money.

By ‘drip-feeding’, you wouldn’t have lost a big chunk of money when the price per unit dipped – and crucially, your monthly payments would now be buying more units at a lower cost.

Of course, things can go the other way. A market spike after a lump-sum investment would result in significant gains. Drip-feed investing simply spreads your risk.

This also takes away the psychological strain of trying to decide when the best time is to invest. That’s because this approach is more about the time you spend invested in the market, than timing the market.

So, if you have a small amount left from your wages each month, drip-feeding it into an investment could help you to save towards your longer-term goals.

Bear in mind all investments can go down as well as up, and you may get back less than you put in.

How does drip-feed investing work in practice?

If you invest the same amount of money each month, you’ll buy more shares when prices are low and fewer when prices are high.

The table below illustrates drip-feed investing over the first year of a £50 per month investment. Please note that the unit prices are strictly illustrative and not based on any real-world examples or projections. For simplicity, no charges have been included.

Month	Monthly contribution	Unit price	Units purchased
1	£50	£2.50	20.00
2	£50	£2.00	25.00
3	£50	£1.50	33.33
4	£50	£2.50	20.00
5	£50	£3.00	16.67
6	£50	£3.25	15.38
7	£50	£2.50	20.00
8	£50	£2.00	25.00
9	£50	£1.75	28.57
10	£50	£1.50	33.33
11	£50	£2.00	25.00
12	£50	£2.50	20.00

With the fluctuations in unit prices over the course of 12 months, the cost per unit averages to £2.13, with approximately 312.28 units purchased. Had the same amount (£600) been invested as a lump sum in the first month, it would have cost £2.50 per unit, with only 240 units bought.

As this is only an illustrative example, there is no guarantee that drip-feed investing would result in a cheaper average unit price over the long term. For example, investing a lump sum could work out the more cost-effective option if unit prices continually rose throughout the period of your investment.

It’s also important to remember that the example above does not include any transaction fees. And it’s possible that a lump sum investor may incur less fees than someone who breaks their investment down into several smaller contributions.

You should familiarise yourself with fees and other outgoings before starting your investment.

How can I get started?

If you’re interested in trying out drip-feed investing for yourself, you should start by setting a realistic monthly contribution. Think about if you have a regular amount left at the end of every month. By investing this each month, you could start to see your money grow.

To stay on track, you could consider setting up a direct debit to your investment account, so that you don’t forget to invest each month. This will stop you accidently allocating the money to something else.

If you have a pay rise or get a promotion, you could think about contributing this money to your monthly investment. Especially, as these will be funds that you’re not already used to receiving in your pay packet.

Why staying invested matters

Although it can be tempting, try to avoid stopping your contributions during market dips. History suggests that investment markets often bounce back, and, if you stop your contributions, you’ll miss out on buying units that month that could then rise in value.

There are a variety of investment options but try to stick to just one early on and see how your initial investment grows over time. Remember, drip-feed investing is about consistency and time in market, not timing the market.

You should also ensure you do your homework when it comes to fees for platform costs. Every provider will have their own fees available via their terms and conditions. Make sure you read them and familiarise yourself with any potential monthly or annual costs to avoid an unwelcome shock in the future.