Introducing pound cost averaging

When you think of investing, you might assume you need a large amount of money upfront, and a lot of us don’t have that sort of capital sitting about. Or at least if we do, we might not want to take risk with so much of our savings.

That’s why investing smaller amounts, on a regular basis, could be a more suitable approach. It would mean setting up to invest some money each month, so the amount you invest builds up slowly. It’s an approach known as ‘pound cost averaging’.

How it works

• Let’s say you pay £500 a month into an investment fund. You’re taking less commitment up front compared to, say, investing £20,000 in one go.
• It means you can quickly develop a really good habit of investing some of your money each month, alongside your regular bills, for your long-term needs.
• Because you’re putting in smaller amounts, the short-term ups and downs of stock markets aren’t as significant. For example, if markets were to have a fall a few months after you start investing, you won’t be as affected compared to putting in a lump sum. With less invested, there's less you could lose.
• As investment fund values change all the time, that £500 a month will sometimes go further. Let’s say in month one, the cost of a share is £100. That means the £500 would buy five shares. But then in month two, the cost of a share falls to £50. Your £500 could now buy 10 shares.
• This could mean that, in the long term, you could buy more shares (or units in your fund) than if you had invested a single lump sum.
• If the markets are volatile, then you might buy more units for each regular payment, and in the long term (if markets recover) then you might end up with a bigger fund than if you had invested a single lump sum.

When markets are volatile – like they have been recently – a pound cost averaging approach can help you to protect your money from sharp falls. It’s also a really good way for people to take advantage of the benefits of investing if they don’t have a lump sum.

So why do some investors prefer to invest lump sums?

There are some possible drawbacks to pound cost averaging, compared to placing a lump sum in an investment fund.

• If markets rise steadily, then you might miss out by regular saving. This is because less of your money will be in a position to benefit from the upturns.
• A good run of performance for an investment fund would see its value rise, so your £500 monthly contribution doesn’t go as far. Going back to that example before, if the cost of a share went up from £100 to £125, your £500 would only be able to buy four shares instead of five.
• Over time, that could make it more expensive to invest into the fund compared to investing a lump sum upfront.

We’re here to help you invest in a way that’s right for you

At Skipton, you can be confident of receiving personalised financial advice on planning your future. This includes helping you to consider if you might benefit from investing on a monthly basis, or investing a lump sum.

For peace of mind you should know there is no-obligation to act on our advice – or an upfront fee to pay.

If you’re able to invest a minimum of £500 a month – or a lump sum of at least £20,000 – our financial advice service could be right for you.

Your adviser will explain the potential benefits and drawbacks to investing a lump sum, or making monthly investment contributions. They will research and present you with suitable options, so you can make informed decisions.

Already investing? How pound cost averaging could help you further

Many of us have seen our money habits change a lot over the last few years. Investing your money could go a long way towards enhancing your long-term future – such as boosting your pension.

Pound cost averaging could help you put this extra money to good use to boost your plans – we can help you invest in this way.