Investing is a powerful tool for achieving long-term financial goals, whether it’s saving for retirement, funding a dream home, or creating a nest egg for your children. However, it can be confusing to know when it is best to invest, especially in the current climate where cash is offering such favourable returns.

Pound Cost Averaging is an investment strategy that focuses on consistency, rather than timing. Timing the markets is nearly impossible and often costly if you get it wrong. Instead, pound cost averaging suggests that individuals should instead commit a fixed amount every month to invest to help reduce the effect of volatility on their investments.

Pound cost Averaging in Action

For example:

• Sarah decides to invest £1,000 in a fund every month.
• In January, the fund is trading at £50 per share. Sarah buys 20 shares.
• In February, the fund price drops to £40 per share. Sarah buys 25 shares with her £1000.
• In March, the fund price rises to £60 per share. Sarah buys 16.67 shares.

Over three months, Sarah has invested a total of £3000. Despite the fund’s price fluctuations, she has purchased a total of 61.67 shares at an average cost of approximately £48.65 per share.

This displays how contributing a fixed consistent amount means your money purchases more shares when prices are lower and fewer when they are higher, ultimately reducing your average cost per share.

Benefits of Pound Cost Averaging

• Risk Mitigation- Pound Cost Averaging helps you reduce the risks of timing the market, and instead helps you purchase more units when prices are lower
• Emotional Reassurance-It’s easy to get caught up in market fluctuations and make impulsive decisions or to feel overwhelmed with knowing when to invest. Pound cost averaging takes away the need to make these decisions by automating your investment strategy.
• Consistency- Regular contributions help you stay committed to your long-term financial goals and can be more achievable than aiming to invest large lump-sums instead.

Conclusion

Pound cost averaging is a straightforward yet effective investment strategy that can help individuals steadily build their wealth over time. It doesn’t require in-depth market analysis or attempts to predict the perfect entry points. Instead, it relies on the power of consistency, discipline, and the principle of buying more when prices are low and less when prices are high.

Please be aware that your monies can go down as well as up, and you may get less than you put in.