INVESTORS brave enough to dip their toe back into the stock market face a dilemma: should they invest a lump sum or cut the risk by drip feeding their money into shares?

Research shows that if the markets stage a strong rally, a lump sum will produce a better return because the full amount is invested to take advantage of all the gains.

Prior to the recent jitters, investors had been enjoying one of the longest bull runs in history. The FTSE All-Share rose 93% between April 2003 and the beginning of July so lump-sum investing paid off.

Figures from Bestinvest, an adviser, show that if you had invested £1,200 in April 2003, your money would now be worth £2,437 compared with £2,046 if you had invested £100 each month between April 2003 and April 2004.

However, it takes courage to invest a lump sum because if shares slump you could suffer big losses. Given the uncertain outlook advisers recommend drip feeding on a monthly basis as a way to cut risk.

Figures from F&C, a fund manager, show that anyone who had invested a lump sum in the FTSE All-Share at the beginning of 2000, 2001 and 2002, in the depths of the last bear market, would have lost 6%, 13% and 23% by the end of each respective year. But if they had invested monthly throughout those calendar years, their cash would have grown 7% and 3% in 2000 and 2001 and fallen by 5% in 2002.

Justin Modray at Bestinvest said: “It is virtually impossible to time the market perfectly, so your best bet is not to try.”

Investing monthly results in better returns during times of turbulent or falling markets because you benefit from pound-cost averaging. If you invest a set amount on a regular basis, you buy fewer shares when their price is high, but more when the price falls.

For example, if you made regular contributions of £100 a month and shares were at 100p one month, you would buy 100 shares before costs were taken into account. But if the price dropped to 50p the following month, your savings plan would buy 200 shares before costs. So you’d get more shares for your money.

Jason Hollands at F&C said: “Regular savings provide a great discipline to just keep on going through the good times and the bad.”

Most fund managers offer monthly savings schemes and many stockbrokers offer special deals to investors who want to trade on a regular basis.

Times Recommends

• How to sell your home in a downturn
• How to boost your spending power
• Unemployment benefits explained