How to invest

It's all down to a personal choice based on attitude to risk. The choice is between a one-off lump sum or a monthly 'drip feed'. 

If you're lucky enough to have plenty of spare cash, then a lump sum can start working for you immediately and – hopefully - generate greater returns from the very start.

But if you don't, and can't afford the risk of putting a lump sum into a fund immediately, for fear of losing a chunk of it in a wild market seesaw, then a drip-feed is the answer. 

This canny method, known as "pound cost averaging", lets you hedge your bets by buying a 'unit' in a unit trust fund (see 'Building the basics' box) at an average price.

Let's take an example.

From January to June, your monthly £50 direct debit buys you 10 units - worth £5 each - in your chosen fund. 

But then a spell of robust economic results helps spark a market surge and boosts demand for your fund and all the shares in it – and its price rises.

Now the monthly cost to you of investing has risen to £7 a unit – meaning your £50 only buys only 7.14 units with your next payment. But it means that every one of your existing 60 units (bought for £5 each) will now be worth £7.14 a piece. 

Once again, we're back to the key to better investing: unless you're a high-risk stock picker, with enough cash to dip in and out of the market, you should be putting your money in for the longer term - at least 10 years.

A golden rule, however, is not to pick a couple of funds for your money and then leave them there without a single glance behind you.

It's critical to check its performance at least twice a year, and keep a tab on its peers by using top websites such as www.trustnet.com that let you easily compare like-for-like figures. 

If you discover that your fund is in the bottom 10 per cent of all funds in its industry sector over at least nine months, then it's probably time to switch your money.

And yet…

You shouldn't be moving your fund too much!

There's an infamous adage – adopted, effectively, as a rallying call - from fund manager Fidelity, but it's one that is widely endorsed by IFAs across the country.

Its siren call is that "it's time in the market that counts, not timing".

While fund managers have a reputation for promoting slogans under their own banner, this one is a rare example of common sense, too.

To emphasise its point, Fidelity underlines the dangers of trying to play the market by switching your cash between funds to try and catch the 'ups' and avoid the 'downs' - and missing out on key dates over a 15-year period when shares rally.

In its example, it shows how £1,000 invested in the UK stock market back in January 1993 would have  been be worth £3,452 by early 2008 if left untouched.

It then scrutinised the impact of trying to play the markets, and missing out on a number of the stock market's best days when the index rose by the biggest margins.

By timing it badly, and mistiming the best 10 days, your final amount drops from £3,452 to £2,293; the best 20 days, it plummets to just £1,682; the best 30 days and the sum drops even further to £1,273; and even worse, the best 40 days ... just £985.

Now, this isn't simply to scare you but to show you what can be achieved by remaining calm and riding out economic cycles, taking the rough with the smooth. 

Of course, for most people who don't work in the financial services industry, it's the case that a sudden lurch in the stock market - especially after months if not years of rising stock markets - can spark huge panic, but a calm head will certainly be the much better option.

Why invest?

CashQuestions Guide to Investment Risk levels

CashQuestions Guide to Tax-free Investments

CashQuestions Guide to Where to Buy

CashQuestions Guide to Online Sharedealing

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