If you have a lump sum and want to invest it, what’s the best strategy to do so? Do you invest little by little or all at once? If you fear the impact of inflation, rising interest rates, and further market volatility, you might let that influence your decision making process, or perhaps put you off investing entirely.
This does not constitute advice and advice should be sought in all instances before acting on it.
What is pound cost averaging?
Pound cost averaging is an investing strategy that can help to mitigate the effects of market volatility and reduce your overall risk. It’s one of the most important investing concepts to understand and put into practice.
If you have a lump sum, you might be tempted to wait until the perfect time to invest, but consider investing at regular intervals instead. Trying to wait until the ideal time to enter or leave the market is a wild guessing game. You could miss a perfect opportunity waiting for an even better moment. You run the very real risk of investing at the top of a market cycle, or exiting at the bottom.
However, when you buy at regular intervals, the average price you pay might work out to be lower than if you’d made one lump sum investment at the peak of the market.
Consistency is key
Pound cost averaging as a strategy expects the market to be volatile and incorporates that assertion. One way to invest a lump sum would be to do so all at once, but there are flaws with that approach. But, for example, you could take £200,000 and invest it in regular intervals, like £20,000 each month for ten months.
You could even use the strategy even more long-term by investing only £2,000 every month, extending the amount of time you’re investing while consistently feeding your investments. This means that no matter what the market looks like, you are still investing.
Regular reviews of your strategy
Because markets often move frequently and sharply in both directions, it’s important to take more of a long-term view on investing and keep the reason for investing at the forefront of your mind. Rather than viewing downturns as deterrents, you should think of them as part of your strategy.
It’s important to regularly review your plan to ensure you’re still on track and make any adjustments necessary. No matter how much you invest, regular contributions over the years will undoubtedly build you wealth, so talk to your financial adviser to ensure you’re doing all you can in the pursuit of your goals.