What is pound cost averaging?

One of the many things investors go on about is entering the market at the right time. Some suggest that an efficient way to do this is to spread or drip-feed one’s lump sum into the market as oppose to investing it all in one go. In fact during volatile times this strategy allows one to benefit from what is known as ‘pound cost averaging'.

The idea involves investing on a regular basis through investment trusts or regular savings plans (such as ISA schemes) say on a monthly basis. The beauty of this arrangement is that not only does it instil a sense of discipline to one’s investment habits but also avoids trying to second guess market movements and averages the cost of buying an investment. Of course this means that a regular investment of say £100 a month, buys less fund units when markets rise but a higher number will be purchased when shares fall.

However, it is in a falling market that Pound Cost Averaging really comes into its own as investing regularly in volatile and falling markets results in buying more shares and at a cheaper price.

To sum up Pound Cost Averaging is a technique that reduces exposure to falling markets from investing a lump sum. By investing at regular intervals more shares are purchased when share prices are low and fewer shares are purchased when prices are high.The investor will be better off in falling markets. But he investor will be worse off in rising markets.

It is a system that instils a sense of investment discipline which avoids trying to second guess markets. If you want to chew over what might be the best investment strategy for you Enables IFA’s are in Bishop’s Stortford.

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