Birdee (Week 6): Progressive investment

December 11, 2020

Fractionnement des investissements

Article by Aurélie Meyer, Head of Compliance & Risk, Birdee.

Still with a view to sharing experience, this week we are going to focus on a subject that is somewhat different from the previous ones, but which is nevertheless essential in view of the numerous inquiries we receive from our investor or future investor clients.

This week: Is it more efficient to invest gradually or all at once? 

As previously mentioned, our philosophy has always been to offer a discretionary management service dedicated to everyone and this in a simple, digital, low-cost and barrier-free way. We therefore wish to ensure that young and less young alike have access to investment. We promote the idea that with all the economic and political changes and uncertainties, investing your money when you are young is synonymous with anticipation and security. But occasionally, some people, still newcomers, wonder. How to go about investing? Is there an ideal time?

There is no miracle recipe. We generally encourage our clients to ask themselves the right questions about their personal goals and projects. For example, we recommend that they get to know themselves. There is no single method. It all depends on their finances, their goals, the risks they are willing to take, their investment horizon. Nevertheless, there are a few general principles.

It should come as no surprise to anyone that a successful investment revolves around four recommendations.

  • Investment Portfolio Diversification
  • Long term view
  • Investment of reasonable sums of money with in parallel precautionary savings
  • Regularity in payments

This last point may not be sufficiently addressed. And it is probably the least known element, or the least applied unfortunately. We are therefore going to focus today on this question, which may seem simple but is nonetheless indispensable : Should one invest all at once or spread one’s investment over a period of time?

  • A one-time investment is, as the name suggests, a one-time payment of the entire amount you wish to allocate to the investment in question.
  • Progressive investment, also known as programmed savings or DCA, an acronym of “Dollar Cost Averaging” for Anglo-Saxons, consists of investing on a regular basis (frequency determined in advance) an amount fixed from the outset over the long term, even very long term.

At Birdee, we encourage our clients to invest on a regular basis whether it is weekly, monthly, quarterly… The monthly frequency has the added benefit of generating a systematic form of savings. This is not trivial for our target customers.

But why should we prioritize this recurring investment? And how should one proceed?

Statistically speaking, by investing a constant amount of money at regular intervals, we obtain a cost price that is lower than the average of the prices observed during successive purchases. Typically, in our portfolios invested in ETFs, we buy more shares when the price is low and fewer shares when the price is proportionally high. This results in a unit cost price that is lower than the average price recorded over the period.

Investing a larger sum at once leads to a clear observation: the result of the investment will be very dependent on the chosen entry point. Investing when markets are rising does not have the same impact as investing the same amount when markets are falling.

In particular, an investor may enter the markets at the wrong time (at the peak of the markets, just before the start of the downturn) and unfortunately have to wait several years before regaining the value of his initial capital.

Investing gradually smoothes out this entry point: it becomes (with the exception of a few elements) the average price observed during the progressive investment phase. In other words, by investing the same amount, on a regular basis, in the same financial assets, one reinforces the investment in a bear market and reduces it in a bull market.

From a retirement preparation perspective, for example, programmed investment can be very useful. Because it allows to reach a good profitability while reducing the risk. It is thus a good technique for building up capital over the long term. For this reason, we consider this approach to be all the more useful for young investors who may not have a large initial sum to invest but a strong willingness to save.

But in concrete terms, how to proceed? At Birdee, we recommend that our clients set up a system of recurring transfers with their bank using the standing order principle. Once this scheduled payment has been established, they no longer need to worry about it. They invest in several installments and save regularly without even thinking about it.

And our investor clients do not seem impervious to these recommendations. In fact, more and more of them are opting for regular investments. Everyone adapts the frequency and amount of investment according to his own rule: some will put 50, 100 euros each week, others 500, 1000 euros each month.  Some clients prefer to invest larger amounts at regular intervals without imposing a real fixed recurrence. And this pays off.

As proof, clients who have opted for a progressive investment seem satisfied with their performance and are generally loyal customers. In fact, some of them have been with us since the launch of our offer in 2017. This trust is very important to us. As we mentioned in a previous article, lowering the barrier to entry is a bias, but it pays off when our customer base grows gradually and customers opt for progressive investment. For them, the financial effort is less important than a higher one-time investment. For our part, our remuneration retains growth prospects in view of the evolution of our assets under management.

Some financial press articles consider our argument to be erroneous and claim, on the contrary, that investing progressively over the entire duration of the investment, whether in the long or short term, does not represent any interest, either in terms of performance or in terms of risk management. However, their analysis does not generally consider a managed and diversified management as we recommend.

Finally, to summarize the problem in a simple risk/return equation would be to forget the emotional nature of the investment. The latter is nevertheless very present and we bring it to the forefront in our dealings with clients. There are thus other arguments than those mentioned above in favor of recurring investment.

It is less likely to provoke anxiety: investing all of a sudden places a heavy responsibility on the investor. When is the best time? Today? A month from now?

It is much more in line with the investor’s life choices: we are more often confronted with the problem of monthly savings than with the problem of a substantial financial income arriving by surprise. Smoothing is therefore natural.

In conclusion, progressive investment cushions the effect of sharp falls and stock market crashes, such as the one experienced in the first quarter of 2020. This limits the dispersion of results. Admittedly, it may not achieve the results that an investment could achieve all at once at the best time, i.e. when prices are exceptionally low. But no one can predict the evolution of stock markets in the long term.

Therefore, progressive investment may ultimately ensure that you don’t invest at the worst possible moment. The serenity that results from this is probably priceless for investor-savers.