Pound cost averaging is a concept which explains how you can even out the buying price of certain investments.
This can help reduce risk and give you the confidence over time to invest into riskier asset areas.
It can be used by those of you saving regular amounts or investors with a lump sum to invest.
Here’s how it works:
Assets with higher risk tend to be more volatile which means they can move up and down in value over time, often by quite high amounts.
Aa good example would be shares in a company or a fund which invests into shares. The price of those shares or fund may bounce around in this sort of way.
Now think about what happens if you buy into this on one day, a bad day. An alternative is to stagger your purchases into smaller amounts so that you are regularly buying. This means you average out the price you buy at and over time you reduce the risk of poor timing.
This can be utilized by both savers and investors.
Those who save regular amounts, say into a pension or an ISA can afford to consider using higher risk assets such as shares or share based funds as they will be able to play the long game and average out the buying price over long periods.
Investors who have a large sun to invest can do a similar thing, especially if they are nervous of market timing and can simply feed slices of their lump sum into the investment at different points.
That is the basic concept of pound cost averaging and an important one for those of you saving or investing to understand.