In the complex world of investment, timing is crucial. But without the benefit of hindsight, no-one can predict what the market will do – or when. This presents a problem for investors – not just when to invest, but also when to eventually pull their money out of the market.
This is where the benefits of ‘pound cost averaging’ – regular saving – comes into play. Pound cost averaging works on the basis that putting smaller amounts of money into a fund or other investment reduces the overall risk of investing at the wrong time. Compared with sinking one large sum in a single transaction, the risk is mitigated by the fact your smaller, regular sums will buy in over a period of time at a variety of prices.
Of course, in a rising market, regular savings will underperform the growth of a single lump sum because the later investments will miss out on the increase of the early days. However, in an up-and-down or falling market, the opposite is true. Later investments will buy in at lower or alternating prices – some lower than the original price – and will therefore gain a little more when the market finally does rise.
Similarly, regular saving is a great way to build up a lump sum from nothing. A lump sum of £5,000 is a tall order for plenty of people. However, putting aside £100 a month from your income might easier – and the addition of investment growth or interest means you could quickly build up a reasonable amount without necessarily noticing. The longer you can leave that growing amount alone, the more impressive it becomes.
Most investment products offer regular savings as an option, including investment funds, Individual Savings Accounts (ISAs), life assurance and pension plans. If you are considering equities for the first time, this is also an ideal way to start – if prices fall, your regular sum will buy a greater number of units in your chosen fund, which will then generate higher proportionate gains when prices start to rise again. Moreover, the small amount you invest every month should have a minimal impact on your cashflow and your lifestyle, and will also reduce your sensitivity to the short-term ups and downs of markets.
Speak to us at Platinum if you’re thinking of starting to save.