26 Mar 2020
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The world is going through a very tough time right now and we’re all having to adapt our lives to stay afloat in this extraordinary crisis. On top of your daily concerns, you might be worried about your investments. When you see sharp fluctuations in the value of your investments, it’s important to remember that volatility is a normal part of investing and all long-term investors will experience it to some degree at some time.
Correctly timing the market is one of the biggest issues facing investors. To generate meaningful returns, you would ideally invest when the market is at its lowest and sell when its at its highest. But timing trades requires constant monitoring of the markets and the skill to respond at the right time which, even for the most successful of fund managers, is a huge challenge.
You’re looking to grow your money for the future and the current shock to markets has made you understandably anxious. Investors can be described as having two emotions: fear and hope. Fear of losses and hope of a good return on their investment. In the current climate you’re likely to be fearful but there are options for investors.
One way to work around market timing and minimise the risk of large losses is to take the little and often approach to investing, rather than investing a lump sum in one go. During turbulent and uncertain times, this strategy can be particularly valuable. Pound cost averaging is a technique where you make investments on a regular basis, averaging the price you pay for the total investment over time and reducing exposure to falling markets.
The idea is that you buy a fixed amount of whatever you've decided to invest in, maybe individual stocks or a portfolio of passive funds, on a regular schedule, no matter what the share price is. It's a way to make sure you're not buying everything at the highest possible price, and it reduces volatility in the long run.
Investing on a monthly basis means you can smooth out the impact of the highs and lows of the price of your chosen investment. You're buying assets at different prices on a regular basis, rather than buying at just one price and, while riding out the movements of the market, you could also end up better off than if you invested with a lump sum.
When markets have fallen, you can benefit from getting a lower price and may be able to buy more assets. If the market continues to fall, you could accumulate more assets at an even lower price. When the market recovers, you could potentially have a much larger gain because you picked up more units at a lower price that over time has produced a greater return. This strategy gives you some protection from short-term loss and provides smoother returns as the market recovers.
At a time of significant market volatility, pound cost averaging could be a powerful way to produce returns. Investing at regular intervals reduces the risk of buying on the wrong day and shields you from larger losses. In an erratic and unpredictable world, it could offer a little ray of sunshine for investors.
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This information is for UK Professional Advisers only and should not be given to retail clients.The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested.
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