The Financial Group
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THE EDUCATION SECTION Pound Cost Averaging ____________________________ Key points We all know that markets can go up and down. These movements can, at times, be quite extreme. Understandably this can deter some people from investing. However, making regular payments is an approach that can take away some of the worry & can also make the inevitable ups and downs work for you! Here we explain how what is known as ‘pound-cost averaging’ works! What is it? ‘Pound-cost averaging’ might sound complicated, but it is really quite a simple concept. It is based on the principle that when markets are low, you get more for your money & when markets are high, you get less. It is most often used with equity-based investments rather than bonds or fixed income assets that tend to be less volatile. The concept can apply to regular monthly investing as well as spreading the investment of a large lump sum investment over a period of time. How does it work? The simple example below illustrates how this notion can work for you. As you can see, despite the price being the same at the end of the period as at the beginning, pound-cost averaging means that the investment is actually showing a profit! Please be aware this is only an example of what you might get back and is not guaranteed. Time period Investment Unit price Units purchased 1 £100 £1.00 100.0 2 £100 £0.90 111.1 3 £100 £0.85 117.6 4 £100 £0.95 105.3 5 £100 £1.10 90.9 6 £100 £1.00 100.0 Total £600 624.9 Value after 6 periods = £624.90 (624.90 units x unit price of £1.00) Benefits Greater peace-of-mind Drip feeding money into the market can take away some of the worry of investing. If you commit a large lump sum, there is always the concern that there could be a large fall in prices just around the corner. However, making regular payments means you are staggering your investment over time. If the market does fall, you will have only invested some of your savings. In addition, your future payments could take advantage of the cheaper prices that may be on offer. Providing a smoother ride Investing regularly helps smooth your return. This is because you are contributing to your savings throughout all market conditions. Key points of pound cost averaging It can be a more reassuring way to invest It helps smooth your return It takes the worry out of investment decision-making You can benefit from (stock) market ups and downs ____________________________ As always, p lease do not hesitate to contact us if you would like further details or information.