The advantages of pound cost averaging
Please note this blog post was published over 12 months ago and so may not include the most up-to-date information, for example where regulation around investing has changed.
They say “timing is everything”, but when investing that doesn’t always have to be the case. Yes, in an ideal world, you want to invest just before the market takes off. But timing the market is close to impossible. That’s where pound cost averaging comes in.
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 stocks rise, and when they go down your next contribution buys more.
For an example of how pound cost averaging works, imagine you routinely invest £100 a month of your salary into a portfolio of stocks. When the market is up, your investment value goes up. When the market is down, your regular investment buys more, meaning you then get a higher return when the market goes back up.
Think about it like this, your £100 buys you 20 shares at £5 each in month one. A month later the share price has fallen to £4, allowing your next £100 investment to buy 25 shares. This gives you 45 shares in total. In contrast, if you’d have done just one investment of £200 in month one, you would have had just 40 shares. So, through pound cost averaging, you can see how you could get more for your money with routine investing.
Investing set amounts in a routine like pound cost averaging is a good habit for long term success, as each month you can see how you are progressing towards your goal. By keeping to a monthly plan, and not being phased by short term changes, you can ride out fluctuations in the markets. Little and often investing is easy to do, and could help to ensure you enjoy a more comfortable future.