One Fool describes how he supplements regular monthly ISA savings with lump sum investments timed to take advantage of market downturns.
In this article, published last month, I described how I 'borrow from myself'. By dipping into funds earmarked for a lump sum investment in an index tracker ISA, I avoid paying interest to a bank when the occasional cash crunch strikes.
In fact, by accumulating small sums of money in this way, I'm benefiting in more ways than one. For a start, I'm investing in the stock market sums of money that are far too small to invest in their own right. As well as the taxed earnings from a second job, the savings account also receives the contents of a 'penny jar' into which I chuck loose coins, a few pounds here and there from selling unwanted possessions -- any small sum of money that I can squirrel away, in fact.
On their own, these are far too small to invest in a shares ISA: my provider has a minimum lump sum investment stipulation of £250. But accumulated over time in the savings account, the small sums I squirrel away not only earn interest -- and help me avoid paying a higher rate of interest if I need to occasionally dip into them -- but also eventually wind up in the stock market via a lump sum investment, rather than being frittered away.
The savings account also opens up the door to another opportunity: market timing.
While the strategy of accumulating funds in my savings account is with the intention of making an end-of-year lump sum payment to maximise the use of my ISA allowance in a given tax year, there's nothing to stop me taking advantage of a market dip by making earlier payments if I have the necessary funds in my savings account.
As you can see from this chart, in late February and early March the market had an attack of nerves, with the FTSE 100 index falling 375 points from a level of 6,433 on 16th February to just 6,058 on 6th March. So on 7th March, £1,250 made its way from my savings account to my index tracker ISA, buying into the market at a level that was 4% lower than when I made my final lump sum investment of the tax year on 4th April.
4% may not sound much, but given that the FTSE All Share index historically returns 11% a year on a dividends reinvested basis, I was -- naturally enough -- quite pleased to have effectively locked-in a third of that annual growth in less than a month.
And even more pleased to think that a decent proportion of that £1,250 had come from an accumulation of small sums that might otherwise have been frittered away.
Don't get me wrong. I don't just invest in an ISA via lump sums. I also make regular monthly investments which are a good discipline -- paying yourself first is a proven path to wealth accumulation. More than that, regular monthly investments are a good way to iron out stock market fluctuations through pound cost averaging, reducing risk while at the same time benefiting from occasional market downturns.
But regular monthly investments into an index tracker are exactly that: on the same day of the month, every month, your monthly investment of £50 or £100 or whatever buys into the market at the prevailing level of the FTSE 100 index that day. By contrast, with my lump sum investments I'm hoping to finesse that a little by investing when markets dip.
In short, through pursuing a strategy of regular monthly investments, supplemented by accumulating small amounts of money towards lump sum investments to maximise my ISA allowance, I'm building wealth. And doing whatever I can do to take advantage of market downturns allows me to do that even faster.