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 refer 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.
- Market timing
- Minimising risk
- Multiple asset classes
- Portfolio insulation
- Pound cost averaging
- Principles of investing
- Children’s pensions
- Defined benefit (or final salary) pensions
- Defined contribution pensions
- Personal pensions
- Self-Invested Personal Pensions (SIPPs)
- The state pension
- Annual allowance and lifetime allowance limits
- Busting myths about pensions
- Increases to pension age and new normal minimum pension age
- Pension freedoms
- Pension withdrawal methods
- The lifetime allowance
- Delaying retirement
- Generating income from investments throughout your retirement years
- Importance of a retirement wealth check
- Retirement goal setting
- Retirement planning
- Reviewing your retirement plan
- Staggered retirement
- Taking control of your retirement plans
- What can I do with my pension?
- What happens to my pension on death?
Growing your wealth
Goals based investing
- Cash flow modelling
- Creating a financial roadmap
- Investment objectives
- Timescales and market activity and the impact of losses
- ‘What if’ scenarios
- Discussing legacy planning with your loved ones
- Inheritance Tax (IHT)
- Inheritance Tax Residence Nil Rate Band (RNRB)
- Lasting power of attorney
- Lifetime transfers
- Making a Will
- Preserving wealth for future generations
- Protecting your assets for the next generation
- Slicing up your wealth pie