Pound Cost Averaging: Why you need to use this simple investing hack
If you are looking for a smarter way to invest, Pound Cost Averaging could be a strategy that creates greater growth for your money.
Pound Cost Averaging works by smoothing market volatility, you invest at regular intervals rather than the occasional lump sum. The benefit of this is you end up purchasing more units of a fund when prices are low, meaning you could be better off in times of turbulence than you would have been if you had simply invested a lump sum.
This is a potentially smarter strategy than timing markets, which in reality is close to impossible. We all want to buy funds when prices are low, but it is impossible to know when markets will rise or fall. By having a regular investment, you give yourself the opportunity to average out a consistentprice in falling markets, by drip feeding your money into the investment. Through Pound Cost Averaging you are able to iron out fluctuations of an asset’s price over time, removing the need to worry about the right time to invest. Free yourself from market speculation, and let a regular investment do the work for you!
A secondary benefit is self-discipline. By investing a regular amount each month, you are avoiding the temptation to second guess markets. This is a good long-term habit to establish, you’ll learn to not be phased by short term changes, and over the long term you’ll recognise that falling markets could mean more value for money.
The third benefit of Pound Cost Averaging is psychological. Human beings are naturally risk averse, especially it seems when it comes to our hard earned money. If you are new to investing, chances are you’ve got that feeling of not wanting to dive into the pool, you’d much rather dip in at the shallow end. That’s what Pound Cost Averaging is, it is the investing version of easing your way in. Pound Cost Averaging can help smooth out volatility to reduce the risk of investing at the peak of a market. A non-emotional approach to investing, encourage by Pound Cost Averaging, is a great way to remain committed to a long term goal. Staying in the market is ultimately what gives time for growth of your money.
Rather than focusing on timing, Pound Cost Averaging means you routinely invest a regular amount into your investment. This means you average out the price of investments, smoothing out the highs and lows in share prices. When they go up, the value of your investments rise, and when they go down your next contribution buys more.
As an example of how this could benefit you, £100 buys you 20 units of a fund at £5 each in month one. A month later the fund price has fallen to £4, allowing your next £100 investment to buy 25 units of the fund. This gives you 45 units of the fund in total. In contrast, if you’d have done just one investment of £200 in month one, you would have had just 40 units of the fund.
Here’s a simple illustration to show how Pound Cost Averaging can beat lump sum investing. Rather than investing all the money in one go in January, the regular investor got more for their money by drip feeding the money in on the first of each month.
So, through Pound Cost Averaging, you can see how you could get more for your money with routine investing.
The great thing about Pound Cost Averaging is it is so easy to do. All you have to do is set up a monthly direct debit, for example £100 a month to your investment. Think of this as “paying yourself first”, a set amount that goes out of your bank account straight after payday. Remember, this isn’t a cost, this is an investment giving your money a chance to grow over time. Just as you’d pay the rent and bills on a direct debit, do this with your investment before you spend your disposable income.
Adding a direct debit to your True Potential account is easy.
- Log in to your True Potential online account as usual
- Click through to your investments
- Scroll down and select the policy you wish to add a direct debit to
- On the policy page, click ‘Edit monthly investment’
- Enter your monthly amount and bank details, and we’ll take care of the rest
With a regular direct debit, Pound Cost Averaging takes care of itself. And remember, if you’re ever flush with more money to add, you can impulseSave® at any time.
No matter what way you invest, be it drip feeding money into your investment, or lump sum investing, remember the most important thing is time in the market. Long term investing through a Pension or Stocks & Shares ISA could help you to achieve your financial goals, so get started today any consider trying a strategy such as Pound Cost Averaging.