Pound cost averaging

When some people think of investing, they might assume they require a large amount of money upfront. But you can take the approach of investing smaller amounts, but on a regular basis.

This enables you to take advantage of pound cost averaging and reduces your exposure to falling markets. You are effectively spreading out the purchasing of shares or other investments over time to help smooth out the ups and downs of investment markets.

Timing the exact moment to enter or leave the market can be extremely difficult and investors inherently run the risk of investing at the top of a market cycle or exiting at the bottom.

Pound cost averaging versus lump sum investing is one of the most important concepts in investing. Buying at regular intervals means that the average price you pay can be lower than if you had made one lump sum investment at the peak of the market. In other words, over time, regular investments can help smooth out the peaks and troughs.

Instilling a sense of investment discipline

The basic idea behind pound cost averaging is straightforward. One way to do this is with a lump sum that you would prefer to invest gradually – for example, by taking £200,000 and investing £20,000 each month for 10 months.

Alternatively, you could pound cost average on an open-ended basis by investing, say, £2,000 every month. This principle means that you invest no matter what the market is doing. Taking a pound cost averaging approach to investing can also help investors limit losses, while instilling a sense of investment discipline and ensuring that you are buying at ever-lower prices in down markets.

Give savings a valuable boost each month

Any costs involved in making the regular investments will reduce the benefits of pound cost averaging (depending on the size of the charge relative to the size of the investment, and the frequency of investing).

As the years go by, it is likely that you will be able to increase the amount you invest each month, which would give your savings a valuable boost. No matter how small the investment, committing to regular saving over the long term can build to a sizeable sum.