Pound Cost Averaging – Why invest monthly?

Wrapped up:

  • Capturing the average returns of the market and riding out volatility
  • Pursuing a ‘Time in the Market’ approach as opposed to a ‘Timing in the Market’ approach
  • Lump sum investing is where you put down one payment towards an investment
  • Combining both lump sum and pound cost averaging allows you to maximise your opportunity to generate returns
  • Gather’s monthly investment help you on your investment journey with monthly payments that allows you to invest systematically

What is pound cost averaging?

Small and regular contributions to your investment portfolio. It’s a simple concept, with a confusing name. Let’s break it down:

  • Pound – refers to the currency. It can also be “dollar,” or “euro” depending on what currency you use.
  • Cost – the cost/price at which you buy stocks or other asset classes.
  • Averaging – averaging out the return of the market though buying regularly over a period.


  • Example:
    If you invest £10,000 at once the price you may pay for assets might be too low or too high. Or, if you invest £10,000 over several months, you can average out the high and low prices you buy assets at – rather than potentially risking it with a single investment.

    Why is pound cost averaging a good starting point for investors?

    There are a number of reasons why pound cost averaging may be a great investment strategy, particularly for those who are starting out on their investing journey.

    Buying and selling stocks at the best price is tricky business and usually falls down to luck and good timing. Predicting which stocks to buy can be time consuming and difficult, requiring a lot of research and often expertise, which sometimes may not even pay off. Pound cost averaging on the other hand allows you to purchase stocks in various stages of the market cycle, averaging out the return over time.

    Pound cost averaging is also believed to be an effective way of providing some protection against volatility within the market. The price of stocks can fluctuate significantly over short periods of time, therefore by investing small, regular amounts at different stages in the market cycle, you should be able average out the price of your investments over the period and, therefore, should reduce your exposure to market volatility. This strategy emphasises the importance of time in the market, over timing in the market.

    Lastly, pound cost averaging is also aims to be a great way to create a disciplined investment strategy. Getting into the routine of investing little and often allows you to familiarise yourself with regular contributions and get comfortable with the idea of investing for the long-term. This may be particularly helpful if you’re new to investing and slightly nervous, which is normal.

    What are the drawbacks?

    There are a few things to consider that make this investment strategy slightly restrictive. You may miss out on opportunistic purchasing. For example, if a certain stock falls in value, investors may want to take advantage of the price decrease and purchase the stocks at a ‘cheap’ value. You may miss out on this opportunity because your investment schedule is fixed.

    Secondly, if for the duration of your investment, the market is trending upward, your overall return will be lower. This is because you will be continuously purchasing stock as it increases in value, making it more expensive.

    Pound Cost Averaging vs Lump Sum Investing – Who’s the winner?

    Whilst pound cost averaging focuses on regular, systematically timed payments into your investment account, lump-sum investing is all taking all of your investable cash and paying it into your investment account in one go. These one-off payments are usually associated with higher risk and you rely on a timing the market approach.

    Following one strategy can limit your potential returns and restrict your options.

    So, why not try both?

    At Gather you can start investing from just £30 per month, with the option to add a lump-sum investment at any time. That means you create a consistent investment strategy but also have the freedom to invest when you want.


    Disclaimer

    These are the views of the Author only. It is not Investment Advice or a Recommendation from Gather or its affiliates.

    Capital at risk. Always do your own due diligence and consult with a qualified financial professional before making any investment decisions.

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