How to increase the long-term value of your investments

In the light of recent market volatility, it’s perhaps natural to be looking for ways to smooth out your portfolio’s returns going forward. One way for investors to achieve some peace of mind is through ‘pound-cost averaging’, a simple, time-tested method for controlling risk over time. 

Pound-cost averaging enables investors to take advantage of stock market corrections and, by using the theory, you could increase the long-term value of your investments. There are, however, no guarantees that the return will be greater than a lump sum investment and it requires discipline not to cancel or suspend regular Direct Debit payments if markets continue to head downwards.

Regular intervals

The basic idea behind pound-cost averaging is straightforward; the term simply refers to investing money in equal amounts at regular intervals. One way to do this is with a lump sum that you’d prefer to invest gradually – for example, by taking £50,000 and investing £5,000 each month for 10 months.

Alternatively, you could pound-cost average on an open-ended basis by investing, say, £5,000 every month. This principle means that you invest no matter what the market is doing. Pound-cost averaging can also help investors limit losses, while also instilling a sense of investment discipline and ensuring that you’re buying at ever-lower prices in down markets.

Market timing

Investment professionals often say that the secret of good portfolio management is a simple one – market timing. Namely, to buy more on the days when the market goes down, and to sell on the days when the market rises.

As an individual investor, you may find it more difficult to make money through market timing. But you could take advantage of market down days if you save regularly, by taking advantage of pound-cost averaging.

Savings habit

Regular savings and investment schemes can be an effective way to benefit from pound-cost averaging and they instil a savings habit by committing you to making regular monthly contributions. They are especially useful for small investors who want to put away a little each month.

Investors with an established portfolio might also use this type of savings scheme to build exposure a little at a time to higher-risk areas of a particular market.

The same strategy can be used by lump sum investors too. Most fund management companies will give you the option of drip-feeding your lump sum investment into funds in regular amounts. By effectively ‘spreading’ your investment by making smaller contributions on a regular basis, you could help to average out the price you pay for market volatility.

Any costs involved in making the regular investments will reduce the benefits of pound-cost averaging (depending on the size of the charge relative to the size of the investment, and the frequency of investing).

Investing regular amounts could have the advantage of averaging out the cost of your total investment over time and may take away the worry of timing your purchases correctly. Regular investing may be ideal for people starting out or who want to take their first steps towards building a portfolio of funds for their long-term future. To find out more about the different options available to you, please contact us.

The value of your investments can go down as well as up and you may not get back the full amount invested.