Overpriced stock market? Tricks to invest and still make money

The returns shown in the two charts are just average market returns. Many investment funds have outperformed the market and delivered greater overall returns.

Does ‘drip feeding’ your money work?

Unless you have a crystal ball, trying to time the market is pure guesswork. The adage “time in the market is more important than timing the market” has been proved in countless pieces of research.

A prudent approach for those with a lump sum to invest – such as the top-up to the Isa limit – is to split the figure into 12 equal amounts and drip feed the money in once a month over the next year. Fund shops or other investment providers allow investors to set up direct debits in order to do this.

This strategy is known as “pound cost averaging”. When stock markets fall these regular savings buy more shares or fund units. Conversely, when stock markets rise, fewer shares and fund units are purchased.

This clever trick evens out stock market movements and reduces the risk of an investor buying into the market at the wrong time.

The regular purchases enable investors to “automatically” benefit when share prices tumble.

The results can be quite significant. Analysis by Nutmeg, an online investment service, for Your Money found a £10,000 investment each year over the past decade, splitting the money between shares and bonds, would produce a pot of £137,877 using the drip-feeding approach. Investing a lump sum on the last day of the tax year would produce £132,129.

The power of compounded growth

Conservative investors who want to make money from the stock market but cannot stomach the risk of losing should focus on buying income-generating investments.

Shares that pay large dividends or bonds that offer juicy levels of interest can build a fortune, even if the share price remains static, provided that the dividend payments are reinvested every year.

The key, of course, is to buy a share that has the ability to continue paying out a decent dividend for years to come – and which has relative immunity from the markets or wider economic fortunes along the way. Identifying these firms is easier said than done, but once they have been chosen – or a skilled income fund manager has been employed to select stocks – then the magic of compounding can be left to grow returns. More is explained on picking your own income winners, with some recommendations, at telegraph.co.uk/incomeshares.

Russ Mould of AJ Bell Youinvest, the fund shop, said reinvesting income had a spectacular effect.

“It not just banking dividends but reinvesting them which truly unlocks the long-term power of owning shares,” he said. “Based on the UK stock market’s historic 30-year average capital gain of 7pc, with a 3.6pc dividend yield, £1,000 could be worth £20,767 in nominal terms in three decades’ time, if dividends are harvested and reinvested and the UK market matches its historic return profile.

“The same £1,000 would become only £7,655 over 30 years if savers banked the capital gain alone and took no dividend yield at all.”

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