Money tip #130 – The benefits of pound cost averaging and phased investing

2 min Read Published: 11 May 2011

Investors face one major dilemma – deciding when to invest. Obviously investors want to get the best return for their money so it follows that the best time to invest is at the bottom of the market when prices are depressed. The problem is how do you know when we are at the bottom of the market? Jump in too earlier and you could see the market continue to plummet, along with the size of your portfolio. Jump in too late and you've missed the boat. That's where phased investment comes in.

Pound cost averaging

By dripping your money into the markets over time you can reduce the impact of market timing and volatility on your returns. Let's say that instead of investing your full Stocks and Shares ISA allowance (£10,680) in one lump sum you invested via monthly instalments. If the market falls during the course of the year then each of your monthly instalments will buy more shares/units for the same amount of money. Or as American's would say 'you get more bang for your buck'. This is known as 'pound cost averaging'.

Consequently, if markets eventually recover under the phased investment method you will have more shares/fund units than if you had invested all your money in one go at outset (when markets were higher and shares more expensive) – and therefore your portfolio will be worth more.

So what are some of the pros and cons of phased investment

  • Investors will be better off in falling markets.
  • Investors will be worse off in rising markets.
  • Phased investment is a good way to invest long term and stops you trying to second guess market movements.
  • It instils an investment discipline.
  • Plus if you use your Stocks and Shares ISA by investing regularly you will never have to remember to use it in full each year. Goodbye end of tax year fretting!

Image: Sujin Jetkasettakorn / FreeDigitalPhotos.net

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