For a lot of people, one of the biggest concerns they have when investing is timing. Is now the right time to invest? Are markets expected to rise or fall in the coming months? What if I miss out?
These are all natural questions, but a long-term approach to investing essentially nullifies all of them. If your time horizon is upwards of 10 years, the short term fluctuations in markets are likely to have a negligible impact on the eventual size of the portfolio.
It’s also important to remember that timing the market is almost impossible. No one has a crystal ball when it comes to investing – this is why we favour a long-term, diversified approach that aims to spread risk and grow wealth sustainably over time.
The InvestEngine service allows investors to drip-feed funds into an account on a weekly, fortnightly or monthly basis using our Savings Plan feature. This means investors can take advantage of a technique known as ‘pound cost averaging’.
What is pound cost averaging?
Pound cost averaging – first coined ‘dollar cost averaging’ in Benjamin Graham’s The Intelligent Investor – essentially means spreading an investment out over time. Rather than investing one large lump sum all at once, it’s the process of regularly investing smaller chunks with the aim of smoothing out the effects of market volatility.
A significant risk when investing a lump sum is that the market falls immediately after you’ve invested. With pound cost averaging, the lump sum is spread out into a number of smaller investments over time. This means the impact of a market fall immediately after investing is limited to only the smaller portion you invested. In fact, a falling market benefits pound-cost averaging, because the next portion you invest will buy more shares at a cheaper price.
No one wants to buy at the top of the market. Equally, it’s very difficult to predict when the bottom of the market will be. With pound cost averaging, timing the market isn’t the goal.
Ups and downs are a natural part of investing, but pound cost averaging means not reacting when they arrive – you’re investing either way. The most difficult decision you have to make when utilising pound cost averaging is how often and how much you want to invest. After this, you can sit back and let your portfolio grow bit by bit.
There’s an inherent flexibility to pound cost averaging, too. Without investing a large lump sum all at once, you can subtly change the direction of your portfolio or explore different areas without having to rip up the investments you’ve made so far. It’s a measured, methodical approach to investing that many advisors recommend.
Get started with Savings Plans
We’ve made pound cost averaging a built-in part of our service. Using Savings Plans, investors can build a portfolio (or invest into a single ETF), set how often they want to invest and how much, and we do the rest using our suite of tools.
You might, for example, want to set up your Savings Plan so that money is deposited just after you’ve gotten paid. With our DIY portfolios, fractional ETF investing means that you can invest as little as £10 a week into your portfolio. So, when your regular top-up comes in, it can go straight into the market without you having to lift a finger.
AutoInvest is automatically switched on when you set up a Savings Plan, so any cash that builds up in your portfolio will automatically be invested for you – you can turn this off if you wish. You’ll also be able to set your investment weights and, through smart portfolio top-ups, we’ll stick to them. This means that your regular investments always maintain the balance in your portfolio.
If you choose a Managed portfolio, your top-up will be automatically added to your portfolio on your behalf.
So, if you’re lucky enough to find yourself with a lump sum to invest, or you just want to start putting your money into markets regularly, a Savings Plan that utilises pound cost averaging may well be the ideal solution.
The average investor doesn’t have the time or inclination to monitor markets daily and make educated guesses about fluctuations. For most people, a “set and forget” approach is preferable – putting together a well diversified, robust portfolio that can be built up over time, without having to worry too much about investing at the middle, the top, or any one point in the market cycle.
Capital at risk. The value of your portfolio with InvestEngine can go down as well as up and you may get back less than you invest. ETF costs also apply.
This communication is provided for general information only and should not be construed as advice. If in doubt you may wish to consult a professional adviser for guidance.
Tax treatment depends on personal circumstances and is subject to change, and past performance is not a reliable indicator of future returns.