Pound cost averaging definition

What is pound cost averaging?

Pound cost averaging involves investing a fixed amount of money at regular intervals, regardless of the asset’s price. You’ll buy more when prices are low, and less when prices are high.

The key idea behind pound cost averaging is to buy regularly with a fixed amount of money, in the hope of reducing the impact of market volatility on your investment portfolio’s overall performance.

 

How does pound cost averaging work?

Here are the three main things to keep in mind when trying to understand how pound cost averaging works.

• Regular investment: with pound cost averaging, you commit to investing a fixed amount of money at regular intervals – like each week or month.
• Buy more when prices are low: if the asset’s price is low at the time of your scheduled investment, your fixed amount will buy more shares or units.
• Buy less when prices are high: if the asset’s price is high when you invest, your fixed amount will buy fewer shares or units. This prevents you from overstretching yourself when the market is at a peak price.

Automated investment tools can be especially useful when you’re trying a pound cost averaging investment strategy. When you invest with Moneybox, you can set up a regular weekly deposit of a fixed amount – which means you’ll be benefiting from pound cost averaging without even having to think about it.

 

Benefits of pound cost averaging

Here are some of the key benefits of pound cost averaging to help you understand more about why you might consider using this investment strategy.

Reducing market timing risk: since you’re investing at regular intervals, you don’t have to time the market. You avoid the stress and risk of trying to buy at the exact bottom or sell at the top.

Discipline: pound cost averaging encourages a disciplined approach to investing. By automating your investments, you’re less likely to make impulsive decisions based on short-term market fluctuations.

Averaging out costs: over time, pound cost averaging helps you achieve an average cost benchmark for your investments. This reduces the overall impact of market volatility on your portfolio, because even if you buy when prices are high, the average price of your portfolio will be lower.

It’s important to note that pound cost averaging is not a guarantee of profit or protection against loss. It doesn’t guarantee that your investments will increase in value, and you can still lose money.

Pound cost averaging is usually used over the long term, and it’s effective for goals like building your retirement savings or to grow a diversified investment portfolio. It can be especially effective when investing in volatile assets like stocks – where prices can fluctuate significantly in the short term, but can trend upwards over the long term.

 

All investing should be long term (min. 5 years). The value of your investments can go up and down, and you may get back less than you invest.