As you go deeper down the stock market investing rabbit hole, it’s likely you’ll come across the term “pound cost averaging”, also called “dollar cost averaging” in the US. 💸
This is a phrase used in the investing world to describe a specific type of strategy for people who are investing long term and want an optimal outcome for themselves and their money. We put together this short guide to help you understand what pound cost averaging is about, the various benefits of engaging in it and how to decide if it’s the right strategy for you.
What is pound cost averaging?
Imagine you receive a big windfall of money; maybe it’s a present, some inheritance, the lottery or a work bonus you didn’t expect. Do you invest all the money at once? Or do you spread it over month by month?
With pound cost averaging, you invest your money month by month. This is a strategy used by investors who prefer to spread their investments over the long term. It’s an especially effective strategy if you are someone who gets emotionally influenced during crashes and recessions and are prone to panic selling and purchasing on impulse.
It’s called pound cost averaging because it reduces the average cost of shares you may be buying, and balances out fluctuations in the market.
According to a study in the US, someone who invests a lump sum gets higher returns than someone who does pound cost averaging. However, the main benefits of pound cost averaging are more practical and mental rather than financial. If you buy a little bit every month, you won’t regret buying if the stock market dips right after. You’ll also be able to integrate your investments more easily within your monthly budget.
Pound cost averaging benefits
Get in the habit of saving
If you’re someone who struggles to save and invest regularly, pound cost averaging makes it easier to implement a habit. You’ll be encouraged to set some money aside every month, and this will get you into the habit of saving. If you set up a direct debit, you’ll be investing and saving without even having to actively do it yourself. 🎉
Most people try to buy at the dip, sell at the high and check stock market prices every day. If you don’t enjoy the stock market game, it can be stressful and is also a loser’s game – only professionals can truly time the market (and 85% still get it wrong). But with pound cost averaging, you can remain at peace with the fact that you are investing in the stock market every month no matter the price. It removes the temptation to act on emotion.
This is why at Minted we offer a monthly purchase plan to people who want to buy a small amount of gold every month and not worry about prices. With Minted, you can buy gold while you sleep.
Ignore the fluctuations
By investing the same amount every month, your investments won’t fluctuate massively and stress you out. Instead, you’ll notice your investments slowly increase over time, helping instill confidence and make you feel more in control. If there is a crash in the market just after you invest a monthly payment, you won’t notice a big difference. But if you invest a lump sum right before a crash, the large swing in numbers may urge you to sell on impulse. 😬
Start with small amounts
If you don’t have a lot of money to invest (that lottery ticket wasn’t a winner), pound cost averaging is a great way to start slowly but surely. Start by setting aside something like 5% of your salary, set up a direct debit to your investment account and watch it happen automatically every month. Even if it’s a small amount, it will be a lot more manageable than trying to save up and only investing once you reach a certain number of savings.
At Minted, we wanted to make gold buying as accessible and affordable as possible, so we offer investors the chance to start investing with just £30 per month. Thanks to Minted, you don’t need to commit huge amounts in order to keep some of your portfolio in gold. And if investing small amounts makes it easier for you to invest, you may find yourself actually investing more in the long term. 📈
Should you pound cost average?
The answer to this question really depends on the type of investor you are. If you are just getting started with investing and don’t have a lot to invest, pound cost averaging makes it comfortable, easy and safe to invest bit by bit.
If you’re an investor who gets easily taken away by the swings in the stock market and acts on emotional impulse, pound cost averaging will allow you to remove the temptation, ignore prices and invest long term.
If you care about making the most of your money and are good at controlling your emotions, then investing a lump sum may be the most appropriate method for you.
Pound cost averaging is usually a term used to refer to investing in the stock market. But really it applies to all types of investments, including gold. 💰 If you invest a small amount of money into gold every month, it’s a lot more accessible and affordable. And once you reach 10 grams worth of gold, you can order your gold and get it delivered to your home!
In short, pound cost averaging means investing in monthly installments. It allows investors to buy stocks or gold bullion more regularly, control emotions that come with price fluctuations and make a habit of saving and investing. With pound cost averaging, you can take better control of your investments and reach your wealth goals.