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Our Services Regular Savings Whether you simply want to put money away for a rainy day or save for a specific reason such as children's education planning, we can advise you on a whole range of options. From traditional endowment type plans to OEICs and unit trust and offshore arrangements, we can help you find a savings plan that best suits your needs.
Pound cost averaging?
This may appear to be industry jargon but does describe how you can build up a capital sum by investing a fixed amount of money in a particular investment vehicle (shares or fund) on a regular, usually monthly, basis.
Pound cost averaging works best with investments that fluctuate in value such as shares or equity funds, rather than bonds or fixed income assets that tend to be less volatile.
The key point about pound cost averaging is that you invest small amounts on a regular basis. This means that when prices are high your monthly contribution may buy fewer shares or fund units, but that when prices are low your investment buys more shares or fund units.
This continuous drip-feed method of purchasing your investment means that the average purchase price paid over any given period is going to be lower than the arithmetical average of the market price. It also instils a useful discipline in the investor, creating the saving habit.
Pound cost averaging takes the worry out of investment decision-making - you do not need to panic when the price falls because you will merely be buying more of your chosen investment and because you are committing funds on a regular basis you need not worry about investing all your savings at the top of the market either.
While pound cost averaging can reduce your risk, it is a strategy that does benefit from volatile markets. The more the market swings the greater the benefit to somebody using pound cost averaging.
For example, if the market swings down every other month then on each downturn you would buy more shares or units, which would be worth yet more on each upturn. In a bear market, pound cost averaging allows you to build up an investment poised to benefit from a recovery without having to worry about trying to work out when the bottom of the market will occur. However, the strategy will mean you would lose out on the best of the growth in a rising market, although this is a small price to pay for the added security that pound cost averaging brings to investment decision-making.
An example of how pound cost averaging can work for you
In a rising market:
Regular Investment Share Price No of shares purchased
£100 £20 5
£100 £25 4
£100 £50 2
Average share price to you: £27.27 (£300 divided by 11)
Average share price: £31.67 (£95 divided by 3)
In a falling market:
Regular Investment Share Price No of shares purchased
£100 £25 4
£100 £20 5
£100 £10 10
Average share price to you: £15.79 (£300 divided by 19)
Average share price: £18.33 (£55 divided by 3)
Summary
Whilst pound cost averaging can reduce the temptation to 'time the market' it may not be right for all investors. It requires a disciplined approach, along with a commitment to continue contributions during periods of market decline. Nevertheless, for those investors willing to stay the course, this strategy has the potential to provide sustained growth over time, regardless of short-term fluctuations.
Contact us now for a free and no obligation review of how you could benefit from a regular savings strategy.
... you may be pleasantly surprised to find out just how accessible the right advice is.
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