The current volatility of markets is likely to have most investors concerned, especially if you are already feeling worried about the increasing cost of living.
Navigating times like these can be difficult and everyone will need to take different action depending on their personal circumstances. However, there is one investing method that is very appropriate at a time like this – Pound Cost Averaging. 
What is it?
The act of making regular contributions to your pension or investment portfolio over a period of time. At some point, you may find yourself with a large sum of money, whether that be from a savings product maturing, inheritance or by any other means.
However you may have received this money, if you’re planning to invest it then you may be wondering exactly how to carry this out.
By spreading your purchases over a period of time you can smooth out market fluctuations, similar to what we are seeing now. When investing you will purchase fewer units when prices are high compared to more units when the prices are lower.
Over a period of time this means the cost level of the units purchased is averaged out, so if the price remains lower than your original purchase point during the period, this could improve your returns.
This is why Pound Cost Averaging can be helpful during turbulent times. Markets tend to outperform cash over the long term, so if there is an opportunity to increase your holding size without using more money, then it may be worth taking this up instead of trying to time the market.
Even if you don’t have a sum of cash available now or in the future, this is a method that may be useful to understand for future reference, possibly if making changes to your portfolio. Further on in the newsletter we also discuss what you can do if you are already fully invested.
The benefits
The idea is that you could avoid a scenario where you invest all your money as a lump sum and the market dropping sharply following this. Whether you are trying to time the market with your investment or not there is always the risk of an impending drop. If you feel nervous about putting all your money into an investment at once, Pound Cost Averaging can help alleviate that.
If there were to be a drop only a portion of your investment is affected, and the remainder of the cash is invested over the period at a lower price, which will mean you have a lower ‘average cost price’.
The risks
There is a possibility that during the period of your regular investments the market moves on an upward trend. Investing monthly means your investment value will still have increased over time, but your overall gain would not be as high as if you invested the full amount at the outset. The investor who invested their money as a lump sum would see the greater benefit. This is because if you are investing over a period where the price increases, your ‘average cost price’ is higher and you will have less units. Pound Cost Averaging is a more effective method in a sideways or downward-trending market.
Market Performance
Historically markets have outperformed cash in the medium to long term, and as markets recover and begin to rise Pound Cost Averaging is more likely to yield lower results. So if plausible with your personal situation, it may be best as a short-term solution instead of trying to time the market and wait for market lows.
Blackrock published data in June that showed in the ten years leading up to 31 May annualised total returns for cash was outperformed by seven different asset classes, including European (and UK) equities. It’s important to remember that past performance is not a guide to future returns.
Why now?
You might find that this method is suitable for you at this moment in time because you’re concerned about market volatility. Or simply because it means that you can still save effectively but by doing so in smaller amounts over a longer period. Meaning that you have more readily available cash as you monitor the cost-of-living situation. This can be a short-term solution to what would hopefully be short-term issues.
One unfortunate scenario would be to invest your money as a lump sum as the prices are currently down.
However, in the near future, your energy bills and general cost of living may have increased more than anticipated. If you needed to recoup some of the funds from your initial investment, but the investment has continued a downward trend, you either may not be able to cover the costs, or your remaining investment will be considerably smaller.
In contrast, if you deposited cash into your investment account and wanted to invest it over time, you would have the uninvested cash available for withdrawal for any unexpected payments or increases to your cost of living. Depending on how much of the cash would need to be used, you may even still be able to continue with your regular investments whilst navigating any unexpected payments.
However, we do believe that cash earmarked for investing should be held separately from any cash that may be used for day-to-day spending. A contingency fund should be available for any sudden costs also.
What if I’m already invested?
All the talk of markets dropping shouldn’t be a cause for concern if you are already holding investments. Time in the market is more important than trying to time the market. Depending on the length of time you are in the market, you could be less and less affected by periods of volatility.
The current economic situation and world events may also be a good time to speak to your adviser about your current portfolio. Re-assessing your portfolio is another important way to ensure durability through turbulent times.
Whitechurch Securities is a privately owned Wealth Management Boutique, established in 1982 and providing Discretionary Fund Management (DFM) solutions since 1990.
