Benefits of Pound Cost Averaging

WHAT IS IT?

Instead of investing a lump sum on one day, you do it over a period of time

WHY SHOULD YOU CONSIDER IT NOW?

  • Financial markets are starting to show signs of declining
  • This current market cycle is an exceptionally long one (10 years from 2008 – 2018) and it is not unreasonable to consider that a major correction could happen imminently
  • If a major correction were to happen, you could expect to see a major decrease in the value of any investment portfolio, regardless of the risk profile

HOW MIGHT THIS BENEFIT YOU?

  • If you were to buy at a single price and the markets were to suffer a major decline, you would feel the full effects of that decline.
  • However, investing in tranches, or regular intervals, allows you to benefit from future prices that may be lower (therefore cheaper) than at the date of your original investment. This shows that declining markets also provide significant opportunities to purchase or enter the market at a less expensive time, as long as you have the time on your side to wait for a market recovery.

THIS EXAMPLE BRINGS THE ABOVE TO LIFE

Table 1 – Investment of £1000 made at a single unit price of £1

Date of investment Amount invested Unit price Number of units purchased Valuation 
 Q3 2018  £1000  £1  1000   £1000

Valuation Q3 2019

Unit price reduces to £0.50 x 1000 units = £500 = 50% decrease in value

  • Investing over a period of time will enable you to buy into markets at a number of different prices rather than at a single price.

Table 2 – 5 Investments of £200 made at a 5 different unit prices

Date of investment Amount invested Unit price Number of units purchased Valuation 
Q3 2018 £200 £1 200  £200
Q4 2018 £200 £0.80 250 £360
Q1 2019 £200 £0.75 266 £537
Q2 2019 £200 £0.60 333 £629.40
Q3 2019 £200 £0.50 400 £724.50


Valuation Q3 2019

Unit price reduces to £0.50 x 1449 units = £724.50 = 27.55% decrease in value

By making the investment in stages, not only have you cushioned the impact of the market losses, you have also purchased 449 more units than you would have done if you had made a single investment.

When the unit price recovers to £1 you will be almost 50% better off than if you had made the entire investment as a single lump sum at a unit price of £1.

Contact us today to discuss how you may structure this within your existing investments and in respect of any new ones you may be considering. let us help you create opportunities.

 

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