What is pound-cost averaging and how does it work?
As you know, the market can go down as well as up. And while it’s tempting to take action in a downturn, one way to ride the waves of the market is to use a strategic approach like pound-cost averaging to help you stay on track. Let’s explore how this method can benefit your investment journey.
What is pound cost averaging?
Pound-cost averaging refers to investing a fixed amount of money at regular intervals, regardless of market conditions. By investing regularly, you’re able to buy stocks and shares at various price points, smoothing out market fluctuations over time. This approach can be a good way to build a larger investment position than buying into the market only once or twice a year, and it promotes a non-emotional approach to investing because you invest regardless of market conditions.
Time in the market vs. timing the market
Attempting to time the market – selling before dips and buying before rises – is incredibly challenging, often leading to missed opportunities and can end up costing you more than you gained.
Staying invested for the long term could be more effective for building your wealth, while market volatility can create unexpected rebounds, historical data, such as the 2020 market recovery after the COVID-19 crash, demonstrates how quickly markets can bounce back. However, it is important to note past performance is not a reliable guide to future gains. You may get back less than you invest.
Pound cost averaging vs. lump-sum investing
- Pound cost averaging: involves investing a fixed amount over a regular time-frame (e.g. monthly). After a period of time, you’ll have paid the “average” price of your chosen investments over that time.
- Lump-sum investing: Investing a large sum at once can be a good way to start strong with an initial investment, to give it time to grow and compound. However, it can be risky if the market declines shortly after.
A balanced approach might involve an initial lump-sum investment followed by regular contributions. This strategy combines the potential for immediate growth with the risk-mitigation of pound-cost averaging.
Investing with Moneybox
Moneybox makes both lump-sum and pound-cost averaging accessible.
Set up weekly deposits, monthly payday boosts, one-off deposits, or round-ups from your everyday purchases and make building your investment portfolio a healthy habit.
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Capital at risk. All investing should be regarded as long term. The value of your investments can go up and down, and you may get back less than you invest.
Tax treatment depends on individual circumstances and may be subject to change in the future.