In the complex world of investment, timing appears to be crucial. However, unless you are gifted with foresight (and believe me, very few investors are) you cannot predict how the stock market will perform. This presents a problem for investors: not only to decide when to invest, but also when eventually to pull their money out of the market. This is where the benefits of ‘pound-cost averaging’ – or, in layman’s terms 'regular saving' – come into play.
Pound-cost averaging works on the basis that, by regularly putting smaller amounts of money into a fund or other investment, you will reduce your overall risk of investing at the wrong time. Compared with investing one large sum in a single transaction, the risk is mitigated, as smaller, regular sums will be invested 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 within 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 almost nothing. Setting aside a lump sum of £5,000 is a tall order for plenty of people, but putting aside £100 a month from your income might be less of an issue – and the addition of investment growth or interest means you could quickly build up a reasonable amount without necessarily noticing. And the longer you can leave that growing amount alone, the more impressive it potentially 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 financial markets.
For more information and advice on regular saving, please get in touch with a member of our team.