By Derek Baty, of Armstrong Watson

Last updated 14:33, Saturday, 29 March 2008

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Little by little: Phased investment removes the risk of investing your capital at the wrong time, and ‘drip-feeds’ the cash into shares or funds over a number of months

Unless you’ve been marooned on a desert island for the last few months the turmoil in global stockmarkets will not have escaped your attention.

 But is there a way to turn this turmoil to your advantage?

 When it comes to investment planning there is one question which tends to be asked more than any other – when is the best time to invest?

The simple answer is to buy when the price is at its lowest and sell when it has reached its peak.

However, the practice is not quite as easy as the theory. Unfortunately, without the aid of a crystal ball, even the best fund managers can’t call the bottom or top of the market with 100 per cent accuracy.

One option is to use phased investment. This takes away the risk of investing your capital at the wrong time, ie the day before a stockmarket crash, and ‘drip-feeds’ the capital into shares or funds over a number of months.

The main benefit of investing regularly is known as ‘pound-cost averaging’.

Don’t let this complicated term confuse you as the principle is quite simple really.

If the market falls, shares become cheaper so your monthly contribution buys more.

Of course, in a rising market, they will be more expensive which will result in less shares being purchased – but then your existing shares should be showing a profit.

Over a period of a few years, pound cost averaging means that the average price paid can be lower than the average share price for that period since more shares are bought when prices are low and fewer when prices are high.

Pound cost averaging works best with long-term investments and is therefore especially suited to putting money to work in unit trusts and other types of investment funds.

For example, if you like the prospects that both the Indian and Chinese economies offer over the next 10 to 20 years, then setting up a monthly direct debit to invest in a couple of funds may be a prudent approach.

The graph below shows how a regular investment of £100 per month invested in a UK equity-based fund over the last 10 years would have performed against a lump sum investment of £12,000 (i.e. £100 x 12months x 10 years).

While investing a lump sum upfront ultimately resulted in a better overall return, investing monthly produced a much smoother return, helped by pound cost averaging, thereby reducing the effects of market volatility.

The falls in the market between 2001 and 2003 meant that the regular investment of £100 purchased more units which helped to boost the investment value when the market recovered.

This time of year sees the annual rush to make sure you don’t waste your ISA allowance.

Would it not be simpler to set up a direct debit of up to £600 per month (remember your annual stocks and shares ISA allowance increases to £7200 from April 6) and not only avoid the risk of missing out on an ISA but also reduce the risk of market timing?

A qualified independent financial adviser will guide you through the investment process and help you to decide whether phased investment is suitable for you.

• Derek Baty is a financial planning consultant for Armstrong Watson. For more information, contact moneymatters@armstrongwatson.co.uk or phone freephone 0800 195 2161