Pound Cost Averaging (PCA) is a term which describes how you can build up a capital sum by investing a fixed amount of money, for example equal monetary amounts regularly and periodically over specific time periods in a particular investment or portfolio. It is most often used with equity-based investments rather than bonds or fixed income assets that tend to be less volatile.
The key point about pound cost averaging is that you invest small amounts on a regular basis. By doing so, more shares are purchased when prices are low and fewer shares are purchased when prices are high. The point of this is to lower the total average cost per share of the investment over a time period, giving the investor a lower overall cost for the shares purchased. This also encourages the investor to create a saving habit, and to have investment discipline and a long term view.
PCA takes the worry out of investment decision-making – you do not need to panic when the price falls because you will merely be buying more of your chosen investment and because you are committing funds on a regular basis, you need not worry about investing all your savings at the top of the market either.
While pound cost averaging can reduce your risk, it is a strategy that does benefit from volatile markets. The more the market swings, the greater the benefit to somebody using pound cost averaging. Most individual investors, especially in the context of retirement investing, never face a choice between lump sum investing (timing the market), and PCA investing with a significant amount of money. The average retirement investor’s situation actually supports a policy of continuous, automatic investing without regard to market direction.
Pound cost averaging requires discipline not to cancel or suspend regular direct debit payments if markets continue to head downwards and not timing a lump sum investment might cause an investor to miss out on the best opportunities of a rising market. There are no guarantees that the PCA return will be any greater than a lump sum investment. The investor also needs to make sure that the frequency and size of regular investments do not attract charges that are costly as any such costs could reduce the benefits of pound cost averaging.
If you want to find out more about PCA investing, contact one of the team who will be happy to help or forward this eNewsletter to a friend who may benefit from our services.
Sources: www.moneyextra.com: www.stockbrokers.barclays.co.uk
