‘Pound cost averaging’ is an investment strategy that can provide regular investors with comfort when markets are particularly volatile.
When you invest a fixed regular amount, the number of shares or units purchased will be higher when the price is low, and lower when the price is high. Someone investing a lump sum will be discouraged when the price of his shares or units falls substantially. However, if a person is investing a fixed amount each month, then when the price falls he will automatically purchase more shares or units each month until the price recovers again.
Like any investment strategy there are situations when this can be useful to an investor and others when it is more likely to reduce the return on your investment.
Where investments are to be made, say, monthly, it is important to be aware that you can take a more adventurous risk than you would if investing a lump sum. This is because you do not have to try and ‘outguess the market’ - rather you can take advantage of the highs and lows.
