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Every week, Kyle Caldwell and guests take a look at how the biggest stories and emerging trends could affect your investments, with practical tips and ideas to help you navigate your way through. Join the conversation, tell us what you want us to talk about or send us a question to OTM@ii.co.uk. Visit www.ii.co.uk for more investment insight and ideas.
Hello, and welcome to our latest On The Money podcast, a weekly show that aims to help you make the most out of your savings and investments. Today, the topic is on the pros and cons of regular investing versus investing a lump sum. I'm gonna be looking at the most popular types of funds, investment trusts, and ETFs for both regular investing and lump sum investing. And joining me to tackle this topic is Dave Baxter, who is senior fund content specialist at Interactive Investor. Dave, welcome back to the podcast.
Dave Baxter:Thanks for having me on.
Kyle Caldwell:So, Dave, let's start off with the pros and cons of both investing regularly and lump sum investing. Let's start off with regular investing. What are the main advantages of that approach?
Dave Baxter:So to use the the intriguing industry jargon, you've got so called pound cost averaging that is, to put it in kind of layman's terms, if you're buying in every month whether, you know, say the market goes down, the fund goes down, you're then kind of buying in at a lower basis, so you're kind of averaging out the cost at which you're buying and that basically helps you weather some of the ups and downs of markets. Whereas if you just chuck in a lump sum, then you could potentially buy in when say the S and P is especially high and it's due to have a fall.
Kyle Caldwell:Yeah. Spot on. Yeah. I think, you know, if you're investing regularly, the main advantage is that you're the ability to smooth returns over the long term. There's gonna be less bumps in the road.
Kyle Caldwell:And as you say, Dave, that if if there is a nasty dip for stock markets, if you're investing regularly, then it's gonna be less harmful for your overall portfolio versus if you invest a lump sum at the wrong time just before the heavy fall for the global stock market, say, falls 10% in a month, for example. That means that it's gonna take longer for your investments to recover over time versus regular investing. I also think if you are investing regularly, you're sort of taking the emotion out of investing, and you can, in theory, you can, you know, you can you don't have to interfere as much with your investments. You can potentially try and buy and hold. I think it's very important to review your investments a couple of times a year, but I do think it gives you greater opportunity to be a bit more passive in terms of the maintenance of a portfolio.
Kyle Caldwell:You don't have to be as hands on.
Dave Baxter:Yeah. I think it's one of those cases where you're letting inertia work for you because you're just putting that money to work. You're not really worrying about it too much. And as we will get on to, you can interestingly, you can almost end up kind of doing some contrarian buying by accident because you might have holdings that at a certain period are struggling, say, you know, we had the kind of this year we had the March sell off and then markets have rebounded since then, if you're just regularly investing, you would have kept on buying, and therefore you're benefiting from any recovery that should come further down the road.
Kyle Caldwell:And in terms of the performance retains of lump sum versus regular investing, there've been plenty of studies and analysis on this over the years. And pretty much all of the ones I've seen have pointed to the fact that if you invest a lump sum and then the stock market is generally buoyant, then you're gonna fare better than making regular investments. However, I think if your preference is to invest regularly, that's the trade off. But you're getting greater peace of mind.
Dave Baxter:Yeah. I think it's interesting, isn't it? Because I imagine, especially if you're an experienced investor, you're and you understand this idea that markets over time do go up, and then you have a kind of a chunk of cash that you want to put to work, then there must be that kind of impatience and frustration factor because you think, I could get all this money to work now and then I'll see markets go up. But yeah, it's just worth bearing in mind those risks of course because if you were not in the buoyant period that you you mentioned, and who knows, things may turn, then you're gonna be in for a kind of rougher ride, and therefore you need to be even more patient if you've put like a, you know, big chunk of cash to work.
Kyle Caldwell:And the final point I'd like to make is, say you identify an undervalued area of the market and you think or an undervalued investment style, and you think, actually, on a long term view, I think it's gonna recover its poise and now is potentially a great opportunity to attempt to buy low. The danger of committing a lump sum is that it can take quite a long time for performance to turn around Mhmm. And you can be too early. Whereas if you're investing regularly, then that sort of protects you in a way from the performance not yet turned around. And then when it does turn around, you're then getting the benefit from it.
Dave Baxter:Yeah. You can definitely be early not wrong for quite a long time, can't you? I mean, I think about value as investment style or, you know, UK equities, like how many years were we listening to kind of UK managers saying that, you know, the market is ferociously undervalued and yes, it's really come into form the last two or three years, but there was a long period where it was still continuing to trend lower.
Kyle Caldwell:And the last point I'd like to make, I think it'd be remiss of me not to say, is that with Interactive Investor, regular investing is free. So do check that out. Now let's get to the performance tables. So I have compiled two tables which we're gonna show on the video version of the podcast that ranks the top 15 most bought funds, investment trusts, and ETFs for lump sum investing and also for regular investing. And the time period that we've looked at for both these tables is from 01/01/2026 to the 04/30/2026.
Kyle Caldwell:Now, there there are some similarities between these two top 15 tables. Well, thankfully, which which which can benefit the podcast episodes, there are some differences as well. Dave, let's start off with the similarities for both the tables.
Dave Baxter:Yeah. So one thing I found really interesting was I would assume that the regular investing table is gonna have a lot of diversified kind of passive funds, like your Vanguard Life Strategy, which is very popular with our customers, your, I don't know, US funds, world funds, and that is definitely the case. And it's around, I think, half or a bit over half are in those kind of funds. But what's interesting is lump sum is pretty much the same on that front, I think maybe there's a couple fewer, but even when people are doing this kind of lump sum investing, they're perhaps putting money to work a bit more taxically or they have a big, you know, chunk of money to put to work, they're still using these kind of fairly diversified funds as a way of getting exposure. Other similarities, I guess one kind of prominent active name you see that appears in both is, you know, the kind of the investment trust darling Scottish Mortgage.
Kyle Caldwell:Just going back to your points on the global index funds and ETFs that are prominent in both the lump sum and the regular investing tables. To me, I think this shows sort of personal preference in terms of, you know, some people prefer to invest a lump sum, be a bit more active, more hands on. Others prefer prefer to be a bit more hands off, and they're just happy to commit a certain amount of their money going in each month and be done with it, really. I think, you know, for a global index fund or ETF is a it's a fantastic sort of core holding in your portfolio to build other positions around. The main decision you have to make is whether you want just developed market exposure to a global index fund or ETF, or you want some emerging market exposure.
Kyle Caldwell:So that's one of main things to look out for, and then, you know, look at the costs and look at the tracking error. You know, how efficient has that index funds or ETF done its job in terms of giving you exposure to the global stock market return. I mean, me, if if a global index fund or ETF, if it has a really poor period, there's gonna be a lot else going wrong in the world. Yeah. That that won't be your only problem.
Dave Baxter:Yeah. It is interesting, though, if you think people are using those kind of global funds and also The US funds, there's even more, I guess, of of an argument about whether the Mag seven are looking good and whether The US is looking good. You know, The US has been a bit out of favor relative to other regions, and particularly last year, but also we're seeing this year so far as well. So it's kind of I don't know. Maybe it's more of a kind of spicier and less of a kind of no brainer play than it used to seem like.
Kyle Caldwell:And regarding Scottish Mortgage, I mean, is this is an example of a investment trust that is very different from a global tracker fund in terms of both its listed exposure, the companies it's own it owns, but also its private exposure. Let's now run through the differences between these two tables. So I'll go first. So I thought it was interesting that we've got in the lump sum table, Royal London short term money market fund is fared. But then it doesn't appear in the regular investing top 15.
Kyle Caldwell:To me, this makes complete sense because there are certain points in which money market funds are attractive, and they are right now because of where UK interest rates are. Six years ago when UK interest rates were at rock bottom levels, this fund sector was not attractive because they were paying very, very little in terms of the amount of income that was generated from the funds. But at the moment, given where UK interest rates are, money market funds, the yields are around 3.8%. And for the cash element of a portfolio, that's a pretty good return.
Dave Baxter:Yeah. And also you just think, yes, stock markets are again somehow doing very well, but, you know, to use another kind of slightly cliched term, it's markets climbing a so called wall of worry because there's so much that people have to be concerned about, whether it's the kind of ceasefire, whether it's rates rising, inflation, all that. So perhaps people are just thinking oh, I want to put some money to the side and not take that investment risk at the minute, and that's kind of an efficient and, as you say, attractively yielding place to put it.
Kyle Caldwell:But you do need to be more hands on with that type of funds. Mhmm. I mean, at the moment, this looks unlikely. But say, you know, if the weird interest rate cuts and then the yield on money market funds becomes lower and less attractive, then you might take the view that actually the the amount of income now being generated from those funds, it's not sufficiently high enough. I'm actually willing to take greater potential risk elsewhere.
Kyle Caldwell:Although, as mentioned, I think the likelihood is The UK interest rates look like they're gonna stay where they are. And if you, you know, if you if you read all the sort of comments from economists and the like, it actually looks like it'd be more likely because of an interest rate rise rather than fall given the events in The Middle East.
Dave Baxter:Yeah. Yeah. So they might stay popular for some time.
Kyle Caldwell:But if you did just sort of buy and hold it and were investing regularly, and say, you didn't check up on your investments for ten years, then you might find that actually, over that ten year period, it's not being beneficial to just regularly buy money market funds, because over that time period, he did he'd expect conditions to change. I mean, I mean, we don't know where interest rates are gonna be out in ten years, but because their returns are dictated by where you can interest rates are, you do need to keep your eye on the performance and where interest rates are.
Dave Baxter:Yeah. And also just over that longer stretch, you need to be much more aware of inflation, don't you, and what it can do versus that kind of low returning assets. You do need to return to to equities or something that's actually gonna outpace that.
Kyle Caldwell:Another difference between these two tables is in the regular investing table in '13, 14 from '15, we have three actively managed products. So we have Fundsmith Equity, Alliance Witten, and FNC. Dave, I'll pass the baton to you for your thoughts on the appearances of these three funds and investment trusts in that table and why do you think they're not in the lump sum table?
Dave Baxter:Yeah. I think they're kind of legacy regular investment plans. So people have got these direct debits, their core holdings are very different types, so I guess Alliance, Wiss and FNC are very well diversified. Fundsmith has more of a concentrated bet, but until recent years, obviously was a massive kind of outperformer. It used to be the the most popular fund in The UK.
Dave Baxter:So I think people have just kind of let those direct debits or whatever kind of run on. What's interesting there is, as I mentioned, Fundsmith has had a pretty rough, how many, four or five years of performance at this point. So Fundsmith is almost a kind of contrarian investment if you are going to invest it. So these people are kind of almost inadvertently backing this underperformer, but who knows, perhaps performance could turn around, we could see those quality funds return to form. Equally alliance with, at least for the last year, has kind of had a bit of a rough year.
Dave Baxter:So, yeah, you're as I mentioned at the start of the show, you're kind of buying in low almost by accident when you stick with these regular investments.
Kyle Caldwell:And in regards to funds with equity, I put it in the same camp as Scottish Mortgage in terms of I do think it's offering you something very different from the global stock market index. Yeah. Of course, it doesn't have any private companies. That's not in its mandate. However, if you just simply look at its top 10, it's very different than what you're gonna see in a top 10 for a global tracker fund.
Dave Baxter:Yeah. And it's interesting also, since late last year, it kind of bailed out of some of its big magnificent seven holdings, for those who didn't know. So it kind of it sold down a lot of its meta position. It sold down a lot of its Microsoft position on the back of these now quite widely held concerns about AI spending. So what you're looking at now is a portfolio that, as it often has had, has a lot of exposure to healthcare stocks, has a bit of kind of, I suppose, luxury goods, that kind of thing.
Dave Baxter:But in theory, you know, if kind of markets get a bit more shaken up, then maybe these companies could prove defensive, so it might still play quite a useful role in your portfolio.
Kyle Caldwell:And it's a very concentrated approach. It typically holds 25 to 30 stocks. Now the other two, Alliance, Witt and FNC, they own hundreds of companies. So they're given greater diversification in terms of the number of companies held. You get more exposure to more more industries and sectors in terms of the amount of companies.
Kyle Caldwell:However, the performances between the two have been quite different of late. Could you talk through the reasons why, Dave?
Dave Baxter:Yeah. So f and c stays much closer to the global index. If you take a glance at f and c's monthly fact sheet, then you will see, you know, NVIDIA, Microsoft, those kind of Mag seven members and they explicitly don't stray massively far from the index, they have a big US weighting. Their main differentiator is that they have I think something like 10 or 11% of the portfolio in this kind of private equity allocation, whereas Alliance Whiston is more it is diversified, but it's a so called kind of best ideas fund, so they allocate to a number of fund managers, they pick a small number of what they think are the best stocks. And while Alliance Whiston does end up with some of those kind of Mag seven shares in its portfolio, it does kind of differ a lot more from the index.
Dave Baxter:And when I interviewed the manager late last year, they were saying things like less exposure to Mag seven, less exposure to US banks, and I think less exposure to some of these kind of high flying but unprofitable companies in areas like AI. That's how they've basically kind of fallen behind the broader markets.
Kyle Caldwell:I mean, one thing I often think about and ask for managers when they have such a huge number of holdings is whether the really small positions that are like north point 1%, north point 2%, whether they're gonna truly make any difference to the overall total returns.
Dave Baxter:Yeah. It's tricky, isn't it? You you wonder what it's doing in the portfolio. Also, I mean, how can they viably research that many stocks? I mean, perhaps what they're doing is they're just having broad kind of allocations to sectors, and they're taking more of a broad brush approach.
Dave Baxter:But it does mean, I guess it means that the fund is, in theory, less volatile, but less volatile in both directions. So it might go down less based on stock specific issues, but it will also enjoy less of those kind of upswings if a specific company does really well.
Kyle Caldwell:And I think a key attraction for investors that are a bit more sort of later on in their investment journey is the fact that both are dividend heroes. They both have increased the dividends year in, year out for over fifty years. They do have small yields. So Alliance Wittens yields to around 2.5%. Mhmm.
Kyle Caldwell:F and C's yields, it's over 1%. I think top, it'd be 1.5%. So so I but I think you need to bear in mind the it's the capital growth that's becoming the the biggest part of the total return rather than the income generated from the investments. But they do both have substantial revenue reserves to in theory keep on increasing their dividends year in, year out. However, I do think for new investor, those yields, they're not that much to get excited about.
Dave Baxter:No. And also, I guess if you don't really need the income, maybe you need to think about what you're doing with that cash. If, say, Alliance Witten is throwing off a bit of dividend at you every now and then, if you don't really need it, then perhaps you should consider reinvesting it, whether it's in the trust or somewhere else, and and therefore you can allow it to kind of grow over time, and that would make quite a substantial difference to how much you end up with in the end.
Kyle Caldwell:Another difference between the two tables is so iShares physical gold, ETC. That's number one for lump sum investing, and it is in where can I find it? It is in eighth place for the regular investing table. And we also have in the lump sum investing table, we have the iShares physical silver, ETC, that's second. However, it does not appear in the regular investing table.
Kyle Caldwell:To me, Dave, this shows the, you know, with lump sum investing, some investors are a bit more tactical, and they're looking at what is performing well. And they're they're hoping then that the performance is gonna continue and momentum is gonna be maintained. I mean, if you invested in gold or silver two years ago, you've done very, very well. I mean, there have been some volatile periods in that in those two years. But I think in I think a lot of investors are buying in hoping that those retains are gonna continue.
Dave Baxter:Yeah. I'm always a bit wary about this because I suppose it can amount to performance chasing. And in the short term that can pay off. I mean, if you've been buying a gold ETC a few months ago, it would have kept going up quite aggressively, but you are potentially setting yourself up for when something turns. So yeah, I guess kind of with things like that, regular investing probably is a better approach just because you can kind of ride the ups and downs, but it is a bit less satisfying than trying to kind of chase that that rush.
Kyle Caldwell:And another another one is Artemis Global Income. So that's number four in lump sum investing. It doesn't appear in regular investing top 15, although it is just outside of it when I looked at beyond the top 15. And again, this is a fund that's performed very, very well over the past three and five years. I recently interviewed the full manager, Jacob de Tuslech, in our insider interview video series, which you can also find on Interactive Investors YouTube channel.
Kyle Caldwell:I I asked the full manager when I interviewed him whether investors are potentially buying at a potential performance peak. Thought he was very candid in the way that he answered it. He did say, yeah, of course, there is there is a potential danger of that given the strong returns over those periods. But the point that he made is the he's been making changes to the portfolio in order to ensure that the sort of average valuation for the portfolio is in is still reasonable, and it is, you know, it's still much cheaper than the wider market.
Dave Baxter:That's interesting. Yeah. Because, obviously, I had a look at his fund wherever it was a couple of months ago and saw of his top 10 holdings, some of them were up by I mean, Samsung Electronics, his top holding was up by more than 200%. But if he is, I guess, rotating that portfolio enough, then you should hopefully see that it still has something of kind of a a value approach, and it's not kind of morphed into a a momentum fund.
Kyle Caldwell:And as we know, over time, you know, certain stocks can move styles. I mean, a growth company three years ago, a share that's classed as a growth share, if it underperforms for a market period of time, that can turn into a value share. I remember quite a while ago, Facebook, before it was called Meta, that turned into a value stock at one point, and there's been lots of other high profile examples over the years.
Dave Baxter:Yeah, and at the minute you have the software stocks, they must be they were sort of classic quality slash quality growth holdings, and now perhaps, after selling off quite hard earlier this year, perhaps someone's eyeing them up as a a bargain opportunity.
Kyle Caldwell:And I wanted to end by talking through which types of funds investment trusts and ETFs are not in either of these tables, which areas are investors potentially overlooking.
Dave Baxter:Yeah. What interests me is, I mean, technically they are captured to differing extents by some of the global funds, but you're not seeing regional equity funds, by which I mean, for example, a dedicated UK fund, a dedicated Europe fund, emerging markets, Japan, and this year, last year and recent years really, if you look at these different regions, you're getting some phenomenal returns, and the fact that they still seem to remain out of favor if you look at things like the amount of money going into those kind of funds means that, yeah, perhaps that's gonna give you some diversification, perhaps there's still more room to run-in terms of where valuations are and it would give you a better rounded portfolio than, for example, even just buying a global fund. Because with those, you are getting some exposure, but often you're not getting that much.
Kyle Caldwell:For me, an area that's potentially being overlooked is smaller companies. I mean, if I had a pound for every time a full manager or an asset allocator said smaller companies are cheap, I'd be able to fill my ASO allowance. However, having said that, I do think if, you know, whether you whether you want global exposure, UK, Europe, exposure to Asia Pacific emerging markets, or even The US, the data, it does stack up. That that that area of the market is much cheaper than the larger company area. And we know over time, over very, very long time periods, smaller companies do tend to outperform larger companies.
Kyle Caldwell:It's known as the small cap effect. So I think if you have a very long term time horizon, now is potentially a good time to, probably more so through regular investing, because we don't know when this is gonna turn, to dip your toe into smaller companies and, you know, potentially buy and hold over the long term?
Dave Baxter:Yeah. I mean, things do mean revert. Things do come back. As I mentioned earlier, UK, UK shares, UK funds, they seem completely in the doldrums if we look back at say 2020, that kind of time period. And now they're riding high again, things are looking good.
Dave Baxter:So, yeah, sometimes you have to be patient, sometimes you can be very early, but you're not wrong, but still worth doing that.
Kyle Caldwell:Well, I think that's a great point to end on, Dave. Thanks for coming on today.
Dave Baxter:Thanks. Having me on.
Kyle Caldwell:And thank you for listening to our latest On The Money podcast. We love to hear from listeners, and the way to get in touch is by emailing otm@ii.co.uk. In the meantime, you can find plenty of practical pointers and analysis articles related to funds, investment trusts, and ETFs on the Interact Investor website, ii.co.uk. And, hopefully, we'll see you again next Thursday.