Stocks and Shares ISA: is lump-sum investing better than pound-cost averaging?

A Stocks and Shares ISA is one of the most powerful tools available to UK investors. This nifty product can shelter up to £20,000 each year from income and capital gains tax, ensuring any returns from dividends or profits are maximised. That makes it a superb vehicle for building long-term wealth.

However, many investors wrestle with the same dilemma: is it better to put a large sum into an ISA all at once, or drip-feed smaller amounts over time using pound-cost averaging?

Each approach has merits. Lump-sum investing puts all the money to work immediately. Historically, markets rise more often than they fall, so investing everything upfront can deliver the best long-term outcome. For example, an investor who put £20,000 into the market in early 2023 would have enjoyed the sharp recovery that year. That would comfortably beat someone who cautiously spread it out over 12 months.

On the flip side, pound-cost averaging helps reduce the risk of bad timing. By steadily investing each month, the investor buys more shares when prices are low and fewer when they’re high, smoothing out volatility. Those who began dripping cash into the market during the 2020 crash were able to average into attractive prices without the anxiety of a single, mis-timed bet.

Truthfully, there’s no universally right answer. The real trick is maintaining a patient, long-term mindset. Whether investing all at once or gradually, success ultimately comes down to choosing great businesses that can be held for decades.

As Warren Buffett famously put it: “Our favourite holding period is forever.”

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.

In it for the long haul

One stock I believe is worth considering and embodies this spirit is Scottish Mortgage Investment Trust (LSE: SMT). Despite its name, this is no traditional mortgage fund. It’s a globally diversified investment trust that targets high-growth, disruptive companies — both public and private.

Around 35% of its portfolio is in technology, with another 31% in consumer discretionary stocks, mainly e-commerce platforms. The remaining holdings span industrial innovators and cutting-edge healthcare. Some of its biggest positions include SpaceX, Amazon, MercadoLibre, Meta Platforms and Spotify. It also holds stakes in Asian giants like PDD Holdings, BYD, and ByteDance, as well as French luxury leader Hermès.

This global, forward-looking approach has delivered impressive returns. Over the past decade, Scottish Mortgage’s share price is up 298%, equating to compound annual growth of nearly 15%. For context, that’s roughly three times the return of the broader FTSE 100 over the same stretch.

Financially, it still looks attractive. The trust trades at a price-to-earnings (P/E) ratio of 11, with a healthy net margin of 50% and return on equity (ROE) of 9.9%.

Of course, growth-focused investments like this face the risk of volatility — as seen during the tech sell-off in 2022. While its tech focus is a key growth driver, it’s also one of the biggest risk factors, as trade tariffs and other geopolitical issues threaten profits.

That’s why, regardless of whether one invests in a single chunk or via monthly contributions, the most critical ingredient is conviction.

By using a Stocks and Shares ISA to back quality businesses and holding them patiently, investors can let the power of compounding do the heavy lifting — and perhaps sleep a little easier along the way.

The post Stocks and Shares ISA: is lump-sum investing better than pound-cost averaging? appeared first on The Motley Fool UK.

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Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Mark Hartley has positions in Scottish Mortgage Investment Trust Plc. The Motley Fool UK has recommended Amazon, MercadoLibre, and Meta Platforms. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.