Pound Cost Averaging

Pound Cost Averaging

Here at Face to Face Finance we’re very much focused on the long-term when it comes to investments. 

If you are worried about the ups and downs in the markets and not sure when is the right time to invest, we look at pound cost averaging as a way to take advantage of these ups and downs by feeding your money in to the markets over a specific time period.

The key to successful investing is to buy low and sell high. So, taking a very simplified view, it makes sense to buy more units of something when prices are low and fewer when prices are high. Timing can make a big difference. 

To demonstrate our point, imagine you have £1,200 to invest at the beginning of the year. Let’s look at two scenarios.

Scenario 1: Purchasing £100 worth of units each month

Imagine that a unit fluctuates in value between £10 and £13 during the year. Being a savvy investor, you buy more units when prices are lower and fewer when the price is higher.

Using this regular savings approach, over the course of the year, you could achieve an average unit price of £9.50. At the end of the year, you hold 126.6 units with a total value of £1,646.

Pound Cost Averaging

Scenario 2: Purchasing £1,200 worth of units in one go

You choose to invest everything up front at the beginning of the year when the price is £10 per unit. So, you hold 120 units which, by the end of the year, have grown in value to be worth £1,560.

Pound Cost Averaging

The closing price is 30% higher than the opening price, so your money has done well!

However, by investing a lump sum, you missed out on buying those units at the cheaper price in the middle of the year before the price rise. So, scenario one actually results in a portfolio which is approximately 5.5% more valuable at the end of the year.

The first scenario is also a better option if the price per unit falls to £8 at the end of December. Whilst the overall value of your investment would have dropped to £1,051, that’s still a smaller loss than under the lump sum investment scenario, where the portfolio would only be worth £960 at the end of the year.

What does it all mean?

The lesson here is that it makes sense to spread commitments to the market over time rather than investing in a lump sum. It’s very simple to set up with a monthly direct debit into a monthly savings scheme. It doesn’t always make sense to be in such a hurry to invest a lump sum!

As with all investments, we are here to answer any questions you have and advise on the best option for your individual circumstances.

If you’d like to know more, please email info@ftof-finance.co.uk or call us on 01603 625100

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