With everything going on in the world at the moment, it’s not surprising that the equity and bond market ventured into volatile territory. But that doesn’t have to be a bad thing — sometimes you can find opportunities in turbulent times.
This does not constitute advice and advice should be sought in all instances before acting on it.
What is market volatility?
Market volatility occurs when market prices fluctuate more quickly and frantically than they normally do. You can use this to your advantage when certain assets, sectors, and even specific companies will be available for a less than before.
When the market is volatile and good companies have fallen victim to the whims of the market, you might be able to get a great deal on a solid investment and win down the line.
There are two options to decide between for how to invest.
- Invest it all at once, hoping that the market stays consistent and performs well so your investment increases month on month.
- If working with a lump sum, drip-feed it into your investment pot in regular instalments over the course of time.
Pound Cost Averaging
While one strategy is to invest in lump sums whenever one is needed, like for an ISA before the end of the tax year, or with a sudden windfall from a bonus or perhaps profit from the sale of a home, there is another option — pound cost averaging.
Pound cost averaging is investing smaller amounts regularly, with the idea being that making regular contributions to your investments will smooth out the ups and downs of the market.
While there are no guarantees with this approach, the logic tracks: some months, if the market is doing well, your shares will be more expensive, but if it isn’t, then shares will be cheaper. And if you buy a few shares every month, the cost should average out over time. If you only invest when you have a lump sum, you could be missing out on these opportunities.
Benefits of this strategy
One of the benefits of regularly investing is that you don’t have to worry about making a mistake trying to time the markets. When you invest the same amount of money regularly, sometimes you’ll win and sometimes you’ll lose when it comes to how many units you’ll get for your money. But over time, this will actually help reduce your risk and provide more stable returns. It will also help foster a more disciplined approach when it comes to investing and help you establish investing as not only a habit, but a priority.
Whatever money you’re saving but not investing will be kept as cash, so it’s important to remember that cash savings currently have very low interest rates. As an investment strategy, it’s a poor one because in the long run, you’ll actually lose money thanks to consistently rising inflation.
Consult the pros
If you want more of a return on your money than you’ll be able to get from a savings account, then you need to invest. And right now, pound cost averaging could help get you the biggest return. If you’re interested in how pound cost averaging could work for you or if you have any investing questions, please contact us today.