Advertisement

Keep calm and carry on investing with pound-cost averaging

Pound-cost averaging is a simple strategy to overcome fear and make sure you capitalise on a crisis.

Nanking Road, downtown Shanghai in 1930 © G
Shanghai before the revolution: a rare time that buying through a crisis wouldn’t have been wise © getty

Most crises ultimately turn out to be outstanding times to invest. There are obvious exceptions to this rule: buying shares in St. Petersburg in 1917 or Shanghai in 1949 in the hope that the situation would improve did not work out. But assuming that the entire economic and political system in which you live is not going to be turned upside down – in which case the best investment may be some gold and a ticket to somewhere far afield – people usually look back in admiration at those who kept calm and bought at the bottom.

Advertisement - Article continues below

There are two barriers to being one of these investors. The first is identifying when you’ve hit the bottom. The second –  which is often underestimated – is the sheer psychological difficulty of investing when all the news is bad, other investors are selling and everything is telling you to do so as well. There is no easy answer to either of these problems, but pound-cost averaging is one of the simplest strategies we can use.

Little and often

Pound-cost averaging – also known as drip- feeding – is less sophisticated than the name sounds. It simply means feeding a sum of money into the market at regular intervals rather than in one go. So if you have £1,200 to invest this year, you might invest £100 per month. If you have £12,000, you invest £1,000 per month. 

The advantage of investing this way is that it reduces the risk (and pain) of buying just before the market drops. If you put all your money in UK shares this month and the FTSE 100 drops steadily over the next year to end up down 30%, your portfolio is also down 30%. If you invest equal amounts monthly, your portfolio may end the year down half that – making it easier to hold your nerve and wait for the recovery.

Advertisement - Article continues below

Obviously if markets rise rather than fall over the time you are averaging your investments, you will make smaller profits than you would if you bought at the start. And the outcome can never be as good as it would be if you somehow invested everything right at the bottom. But a disciplined approach to regular investing helps overcome the inertia and fear that might stop you investing at all until the best of the recovery is over. You also avoid expending effort on trying to identify exactly when a bear market is over, something that you are unlikely to get right: it is enough to believe that markets offer good long-term value.

Most brokers offer regular investing schemes, where you set up a fixed amount to be invested each month and pay a low dealing fee (eg, £1.50 per trade). Not only does this save on costs, but making your investments as automatic as possible means that you are more likely to keep buying when the panic is at its peak.

Advertisement
Advertisement

Recommended

Visit/10944/investment-strategies-how-to-test-balance-sheet-strength-457p23
Investment strategy

Four ways to test balance-sheet strength

In these uncertain times, investors keep being told to look for strong balance sheets before buying a stock. Tim Bennett explains what a strong balanc…
3 Jun 2020
Visit/investments/investment-strategy/601415/great-frauds-in-history-jean-pierre-van-rossems-money-making
Investment strategy

Great frauds in history: Jean-Pierre van Rossem's money-making machine

Jean-Pierre van Rossem told investors he had a supercomputer able to make money by predicting market movements. He didn't.
3 Jun 2020
Visit/investments/investment-strategy/601417/how-income-from-options-could-prove-illusory
Investment strategy

How income from options could prove illusory

Funds that use call options to supplement dividends can offer higher yields, but this usually comes at the cost of lower long-term returns.
1 Jun 2020
Visit/investments/investment-strategy/601408/a-brief-history-of-market-panics
Sponsored

A brief history of market panics

SPONSORED CONTENT - The coronavirus outbreak is just the latest case in the long history of market volatility.
29 May 2020

Most Popular

Visit/economy/uk-economy/601427/covid-bounce-back-loans-and-inflation
UK Economy

What bounce back loans can tell us about how we’ll pay for all this

The government will guarantee emergency "bounce back loans" for small businesses hit by Covid-19. Inevitably, many businesses will default. And there'…
1 Jun 2020
Visit/investments/commodities/601433/commodities-possibly-the-biggest-opportunity-in-todays-markets
Commodities

This looks like the biggest opportunity in today’s markets

With low interest rates and constant money-printing, most assets have become expensive. But one major asset class hasn’t. John Stepek explains why com…
2 Jun 2020
Visit/investments/commodities/gold/601444/these-seven-charts-show-exactly-why-you-must-own-gold-today
Gold

These seven charts show exactly why you must own gold today

Covid-19 is accelerating many trends that were already in existence. The rising gold price is one such trend. These seven charts, says Dominic Frisby,…
3 Jun 2020