Should I invest the same monthly amount into each of my funds or split by percentage?
02 July 2020
Question by Simon
When using regular investment across a range of funds, should I be putting the same amount into each fund or tailoring the amount to the % split I'm looking for? For example, if I started with £1000 split into 5 funds with an initial weighting of 30% each for funds one and two, and 20% for fund three, and the remaining 20% split across funds four and five - if I have £100 to invest per month, should I just split it £20 per fund or use the same percentage split? Also, if it's the same % split, what if the platform I'm using has a minimum regular investment of £20 per fund? Do I need to up the total investment to cover the minimum on all funds, or rotate which fund gets what each time to keep them roughly in sync?
Answered by Holly Mackay
Thanks for your question.
The most important thing with investments is diversification. So make sure you're thinking about where these funds are actually invested.
For example, you could choose to have five funds and think you're doing a jolly good job of diversifying. But if these five funds are all investing into the UK, then you haven't really done a sufficient job of spreading your risk around.
By way of example, I hold a few funds which are in some more esoteric emerging markets and I have quite a small percentage of my overall portfolio weighted to these guys. So perhaps think about your portfolio like a balanced meal, and make sure you've got the right split between the staples, such as carbohydrates, the protein, the vegetables, and perhaps the spicier chilli sauce.
So if you're using five funds, make sure that you look at what the underlying asset allocation is and that you've got a good mix of geographies and sectors.
Once you've chosen the specific proportions that you're happy with, then it makes sense to split your regular monthly investments in the same proportions.
Clearly this becomes harder if the platform you use has these minimum regular investment amounts. In practise it is never as neat as this, because some of your funds will do much better than others.
The discipline is to stick to your investment strategy and to keep your overall portfolio with the asset allocation that you want. This may mean that some months you end up putting more into funds which have performed relatively worse, which can feel counter intuitive.
The better investment platforms will have x-ray tools which let you look through the individual funds down to the underlying asset allocation. I suggest you set up your monthly investments to map to your required asset allocation as best you can. And perhaps check in every three months to see how you're doing.
I would observe that this becomes quite a lot of hard work for £100 pounds a month. I think it's worth considering what we call a multi asset fund which will give you a diversified portfolio, and let someone else worry about doing all the fiddling and tweaking. For £100 a month, this could be a much better alternative.
You should also check that there are no transaction fees on your platform for funds. If there are and you're buying five funds a month for the sum total of £100, you are spending an awful lot of money on transaction costs, and this is not the best way to do it.
Hope this helps,