Regular Investing Guide
What is Regular Investing? Pound Cost Averaging | What is Regular Investing? | Top |
Knowing when to buy and sell shares is not easy, in fact it is extremely difficult. Whilst there are many so-called experts predicting the direction that the market will take, for the most part it is just an educated guess. In reality no one really knows where the market is going, but everybody thinks they know. History shows us that over a period of time the direction of the stock market is upward, so one way to take advantage of this would be to invest in an index tracking fund, which by definition ‘tracks’ the market.
Investing in the market is a long-term thing, it can be likened to running a marathon, you have to pace yourself over the entire period to make sure you finish and not burn yourself out in the first few miles.
A good way to keep on track with the mood of the market is to make regular investments of around £25, £50 or £100 a month into an index-tracking fund. The majority of index tracking funds have a system whereby you can set up a savings scheme and the set up costs are usually very reasonable. By setting up a savings account with an index tracker fund, allows you to take advantage of Pound Cost Averaging, which averages out the ups and downs of the stock market, buying more shares when the market goes down and less shares when the market goes up. As a result of this, the average price you pay per share is less.
| Pound Cost Averaging | Top |
Pound Cost Averaging is a way of investing whereby the cost of buying shares is averaged out over a period of time; it most effectively operates with investments that fluctuate in value such as shares or equity funds. Historically, over the long term the stock market has risen, and therefore the odds for making a good profit from your investments will also become better. Another thing to consider is that as the market continually fluctuates, it becomes possible to take advantage of this by maximizing your share purchases.
Take an example, say you invest 120.00 GBP a month into an index tracker fund, now when the stock market is going up
Monthly Investment Share Price Shares Bought
£ 40.00 £ 6.00 8
£ 40.00 £ 10.00 4
£ 40.00 £ 20.00 2
Average share price to you: £ 8.57 (£120/14)
Average share price: £12.00 (£36/3)
Now another example, again, say you invest 120.00 GBP a month into an index tracker fund, but this time the stock market is going down
Monthly Investment Share Price Shares Bought
£ 40.00 £ 4.00 10
£ 40.00 £ 5.00 8
£ 40.00 £ 2.00 20
Average share price to you: £ 3.16 (£120/38)
Average share price: £ 3.67 (£11/3)
Remember, although Pound Cost Averaging can average the fluctuations when buying and selling and thus reduce the risk of buying or selling ‘at the wrong time’, It may not be ideal for everybody. It takes a lot of self discipline to keep making those monthly investments into the index tracker fund during times when the market is going down. However, for those of you out there that are willing and able to stick with it, Pound Cost Averaging could well be the answer to make a good profit over a period of time and weather the short term volatility that the stock market inevitably experiences.
People that usually invest a lump sum into a tracker fund can also take advantage of Pound Cost Averaging, by investing the lump sum over a period of time rather than all in one go. This effectively ‘spreads the investment’, and the price paid for the shares is averaged out and therefore the risk of buying in at the top of the market is taken away.
