{"id":382033,"date":"2021-03-30T14:35:17","date_gmt":"2021-03-30T13:35:17","guid":{"rendered":"https:\/\/www.finder.com\/uk\/?p=382033"},"modified":"2024-10-11T18:45:32","modified_gmt":"2024-10-11T17:45:32","slug":"pound-cost-averaging","status":"publish","type":"post","link":"https:\/\/www.finder.com\/uk\/share-trading\/share-trading-guides\/strategy\/pound-cost-averaging","title":{"rendered":"Why it pays to be a patient investor"},"content":{"rendered":"

Investing is fundamentally about the long term<\/a>. You typically need to leave your money to grow for several years to achieve a decent return. Think of it like nurturing a tree; you don’t plant a tree then dig it up every few days to check it’s growing (if you do, that could explain why your tree isn’t growing!).<\/p>

Our experts have compiled three ways to help your investments flourish, including how to check whether you’re overtrading, and how to spot dodgy share tips.<\/p>

Strategy 1:<\/span>
Drip-feed regularly: Pound-cost averaging<\/h3>

One way to develop healthy investing habits is to make regular contributions to your investment pot over a period of time, instead of investing a large lump sum. This is called “pound-cost averaging” (or “dollar-cost averaging” in the US).<\/p>

It’s a way of investing without trying to time the market. So in a volatile market<\/a>, you might buy at higher prices while the market’s doing well – but you’ll also get the chance to buy at lower prices when it’s not doing well.<\/p>

How does drip-feeding help?<\/h4>

The year 2020 is a perfect example of a volatile year. We’ll use the FTSE 100<\/a> for demonstration purposes.<\/p>

Our first investor, Harry, doesn’t have a clue what a year we’re about to have and invests \u00a312,000 in the FTSE 100 on the first Monday of the year: January 6.<\/p>

Over the year Harry’s \u00a312,000 is reduced to just \u00a310,217.06 as the total change over the year is -14.86%.<\/p>

Our second investor, Harriet, chooses to go with pound-cost averaging and decides to invest \u00a31,000 on the first Monday of each month in the FTSE 100.<\/p>

That first \u00a31,000 loses 14.86% over the year, like Harry’s \u00a312,000, and the second one doesn’t do well either. But as the stock market crashes in March 2020, Harriet gets the stocks at a lower price, grabbing more investments for her \u00a31,000. The April and May investments gain 10% and 8.84% respectively over the year.<\/p>

In total, Harriet’s \u00a312,000 is now worth \u00a312,262, gaining her 2.18% over the year. Not bad for a year where the FTSE100 lost almost 15% in value.<\/p>

How much should I invest every month?<\/h4>

This is where it pays to have a plan. First, everyone needs an emergency fund<\/a>: enough money to cover around three to six months of outgoings, in an easy access savings account<\/a>, just in case. Assuming you have that and you’re not paying off any debt (except a student loan and a mortgage), the next step is to work out how much you can afford to put aside each month. This can either be a percentage of your earnings or a set amount; \u00a3200 a month tends to be an affordable amount and is a great place to start.<\/p>

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\n \n \n \n \n <\/svg>\n <\/span>\n Why make an exception for student loans and mortgages?<\/span>\n <\/h4>\n
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Mortgages<\/a> are designed to be low-cost borrowing spanning a long period (typically 25 years). Student loans aren’t typical loans since you start to repay them only once your salary tops \u00a326,575 and then you pay only a small percentage of the portion of your income above this amount.<\/p>\n <\/div>\n <\/div>\n<\/div>\n

Try not to commit to putting aside large sums of money that may leave you living paycheque to paycheque, as you’ll want to keep this money invested for several years. You can always invest more if you don’t feel that you’re putting enough aside.<\/p>

You’ll need to factor in charges as well. Trading platforms typically charge you for each individual trade, so if you have a lump sum to invest and want to spread it over several months, you’ll want to ensure that you’re not spreading it so thinly that your fees outweigh your chance of making a profit.<\/p>

Going back to our 2020 example, and assuming that both Harry and Harriet are paying \u00a36 for each trade, Harry pays \u00a36 for his initial investment and nothing after that, while Harriet pays \u00a372 over the year. That’s excluding any platform fees, which many platforms charge.<\/p>

If the platform fee is 0.45%, Harry would pay \u00a354 for the year (0.45% of \u00a312,000). But as Harriet’s full \u00a312,000 isn’t invested for the full year, she would only pay around \u00a330 in platform fees.<\/p>

That means that while Harry’s \u00a312,000 would be worth \u00a310,157 at the end of the year after losses and fees, Harriet’s \u00a312,000 would be worth \u00a312,160.<\/p>