On the anniversary of the Global Financial Crisis low in 2009, we compare regular investing versus lump sum investing through volatile times.
In an inspirational and moving speech to UK MPs yesterday, Ukrainian President Volodymyr Zelensky invoked Shakespeare by asking: “To be or not to be? Now I can give you a definitive answer: it’s definitely yes; to be”. He carries on – because he has to.
The humanitarian disaster in Ukraine is sending shockwaves through financial markets, with fears of a global recession, which people will also have to try to navigate – because they have to.
Richard Hunter, Head of Markets, interactive investor, says: “The oil price has risen again on prospects of diminishing supply and now stands ahead by 68% in the year to date. With the EU also looking to end its reliance on Russian gas, the near-term prospects for inflation remain extremely high and on top of what were already elevated levels. In the meantime, there is clearly a scramble for replacement supplies which extends beyond energy to the likes of metals and food in some areas. The FTSE100 remains down by 4.2% in the year to date. As with markets globally, the apparent lack of light at the end of the tunnel in terms of the conflict is keeping a firm lid on sentiment.”
Global Financial Crisis market low anniversary
With a deteriorating global financial backdrop, today, 9 March, also marks the 13th anniversary of the Global Financial Crisis market low, when the FTSE 100 index traded as low as 3,460.
Regular investing versus lump sum investing through volatile times
New research by interactive investor, the UK’s second-biggest retail investment platform, looks at how regular investors fared compared to lump sum investors during the Global Financial Crisis.
Lump-sum investors commit all their money in one go, so have a greater exposure to market drops (as well as market increases). Regular investors, by contrast, are those that develop the habit of investing money each month, regardless of market conditions, and this can help smooth out some of the highs and lows in the price of shares.
With uncertainty continuing to be the new norm for investors in 2022 already, last month interactive investor outlined how to navigate anxious markets. A key theme we emphasised was having a long-term investment horizon and trying to avoid panic buying/selling, or impulsive investment decisions.
Lee Wild, Head of Equity Strategy, explains: “Making investment decisions isn’t always easy, but volatile stock markets can make the process much harder. An extra element is added to your usual due diligence when it’s armed conflict that’s driving sentiment. History tells us that, despite considerable human suffering, we carry on. It’s the same with financial markets. Stock prices have recovered from every war, bar none - the Second World War, Korea, the Gulf War, Afghanistan, Iraq, all of them. Only the time element changes.
“It's the same for other massive social and economic events. As the 13th anniversary of the Great Financial Crisis arrives, it’s worth remembering that the FTSE 100 traded as low as 3,460 on 9 March 2009. Even after the recent crash, it’s more than doubled in value. Include dividends and total return is over 200%.
“Market volatility can make stock picking more stressful, but there are simple ways to overcome it. Unless you get lucky and invest a lump sum at the bottom of the market, you run the risk of losing a lot of value, often very quickly. Using up all of your cash reserve leaves no funds to deploy if this happens. It’s often better to spread your investments over time. Regular investing both reduces risk and can be hugely profitable when money invested on the way down generates handsome returns on the way up.”
How have regular investors fared versus lump sum investors during the Global Financial Crisis?
ii looked at how regular investors, putting away £50 a month, fared against lump sum investors during the Global Financial Crisis.
According to ii data*, looking at the FTSE World Index, investors who invested a lump sum of £800 at the start of the Global Financial Crisis between 1 October 2007 – 28 February 2009 would have seen their investment shrink to £545 by the end of the period. Those who drip fed that £800 investment on a monthly basis, in £50 per month instalments, would have still seen their investment shrink – but not as much – to £646.80.
For investors who held on for the long term, investing from 1 October 2007 to 4 March 2022, it is lump sum investors who would have performed the best, because more of their money is being put to work in the stock market for longer. But they would have done so with a higher risk profile. A lump sum investment since the start of the financial crisis until 4 March 2022 (£8,650) in the FTSE World has grown to £32,955.40, compared to the £22,190.50 equivalent drip fed into markets on a monthly basis, in £50 per month instalments.
The FTSE 100 has massively underperformed the FTSE World since the start of the financial crisis, but regular investing principle during that bumpy phase for markets would still have lowered your risk profile. Regular investors that put away £50 a month from the start of the Global Financial Crisis (on 1st October 2007) until 28 February 2009 (an investment of £800) would have had £617.90 compared to £501.60 if the investment had been made as a £800 lump sum at the start of the period.
Regular investors that put away £50 a month from the start of the Global Financial Crisis (on 1st October 2007) until 4 March 2022 would be looking at an investment worth around £13,279. Those that invested the equivalent lump sum (£8,650) at the start of the period, and held their nerve, would have made £16,104.
Myron Jobson, Senior Personal Finance Analyst, interactive investor, explains: “It’s easy to look at the data we have presented here and conclude that lump sum investing is the ultimate option. But the reality is much more nuanced.”
“’Buy low, sell high!’ or ‘buy the dip’ are terms thrown around frequently in the investment world. They can be intimidating, confusing, or off-putting. And now we will in an environment where DIY investors are getting more of their investment advice online, on social media, or from so-called ‘investment influencers,’ where we are seeing even more of these soundbites. The current market environment so volatile, many investors will be much more nervous – and to them, we say, lump sum investing is not your only option – and regular investing could help ease the nerves.”
Becky O’Connor, Head of Pensions and Savings, interactive investor, agrees: “The reality is, timing the market is extremely difficult to put into practice, mainly because short of having a functioning crystal ball, it is near impossible to identify market peaks and troughs. This has truly come to light during the devastating war taking place in Ukraine. Oil prices continue to rise – and we are still unsure just how high they can climb to - sanctions towards Russia continue to be rolled out, and emotions run high.
“Behavioural finance experts tell us that reacting emotionally to situations with investment decisions is rarely a good idea. It’s better to sleep on it and aim to act less rather than more, especially during volatile times.”
Myron Jobson, Senior Personal Finance Analyst, interactive investor: “We want to show investors that often, time in the market can be a more impactful strategy than attempting to time the market. Even small, but regular, amounts can really add up over time.
“Investors can make this process easy for themselves – so easy, in fact, that you do not have to think about it. A great starting point is setting up a regular investing plan. Just like household bills, you can set up a direct debit to take a specified amount out of your bank account every month.
“I would emphasise this even more for those who are just starting out in their investment journey. For many new investors, the twists and turns of the market can be very off putting – but it doesn’t need to be this way. Entering the investment world need not be onerous or stress-inducing.”
Notes to editors
* Performance data - source: Interactive Investor using Morningstar Data - Morningstar Total Return. Past performance is no guide to the future.
These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.
Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.