MTTM Podcast Episode 413 – Importance of planning, negative equity mortgage options & pound cost averaging truths

Episode 413 - In this week's podcast we discuss negative equity and what your options are when it comes to remortgaging or if you want to move house. I also explain how the plan I put in place back in 2022 to mitigate rising mortgage and energy costs in 2023 is now helping me to sleep at night. We also look at the latest research on pound cost averaging versus lump sum investing.

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Summary of Episode 413 transcript

Here is a summary of what is covered on this episode of the Money to the Masses podcast.

Pound cost averaging truths

• Pound cost averaging is a method of gradually investing money (also called "dripping") into the market over a period of time usually in equal instalments.
• Vanguard's latest research (see link in resources sector below) compared the performance of lump sum investments to pound cost averaging strategies.
  • The research looked at different time periods for dripping in your money, including dripping in over three months, four months, five months, and six months.
  • The study found that lump sum investing outperformed pound cost averaging around 70% of the time.
  • When dripping money into the market the longer the drip timeframe the less likely the method would outperform lump sum investing.
  • Vanguard's research showed that during extreme market sell-offs pound cost averaging would still outperform.
• It means pound cost averaging is still a valid method of investing and should seen as an insurance policy against a severe market downturn.
• In a worst-case scenarios pound cost averaging significantly outperforms lump sum investing.
• It's important to find an investment strategy that makes you comfortable and helps you sleep at night.
• Other factors, such as investment choices, frequency of portfolio reviews and investment costs also impact overall returns.
• Sitting on the sidelines and trying to time the market (using a lump sum investing approach) is not advisable, as it's difficult to time the market successfully and may result in missed opportunities and inflation eroding cash holdings.

Negative equity mortgage options

In this section of the podcast Harvey discusses negative equity and your mortgage options which she has summarises in the article titled "What is negative equity" in the resources section below.

Importance of planning

In this section of the podcast I explain how a plan I put in place back in 2022 to mitigate rising mortgage and energy costs in 2023 is now helping me to sleep at night. I also discuss the wider importance of planning when it comes to your finances. Some of the points include:

• Planning is crucial for managing personal finances effectively.
• Each person's financial situation is unique, and there is no one-size-fits-all solution so your plan needs to reflect this.
• Planning ahead helps in preparing for potential financial challenges. For example, it is important to anticipate and save for future expenses like mortgage rate increases and rising energy bills if possible.
• Setting money aside and building a cash buffer can help cope with unexpected expenses. You can find out more about how to do this in the resources section at the foot of this article.
• Having a contingency plan is like having insurance for the future.
• Forward planning should also extend to retirement savings and adjusting pension contributions based on personal circumstances. For example if you are struggling to maintain your pension or investment contributions due to the the cost of living crisis you can use a "dimmer switch" approach, gradually adjusting your contributions down and then back up when your finances allow it rather than turning them off completely. Once you stop contributing it is much harder psychologically to restart contributing again.
• Clearing debt and managing interest rates are key aspects of financial planning.
• Formulating a plan helps you take responsibility for your personal finances rather than hoping for government bailouts which may not materialise.

Resources:

• Vanguard: Why a lump sum strategy makes sense
• What is negative equity?
• MTTM Podcast Episode 382 – Mortgage reality check
• Building an Emergency Fund – the what, why & how
• MTTM Podcast Episode 281 - Are premium bonds any good, stealth taxation & accessing emergency funds