The Big Exchange discuses the inherent volatility and the challenges investors face when it comes to the everchanging landscape of the stock market.
Volatility is an inherent part of investing, embodying both risk and reward. The ever-fluctuating nature of stock markets can make it challenging to predict market downturns, as they are influenced by many factors, including economic growth, inflation, interest rates, company valuations, outlooks for different industries, political tensions, military conflicts, technological disruptions, and even the effects of climate change. Amidst the unpredictable nature of investing, one strategy stands out as a powerful tool to navigate market volatility: pound cost averaging.
Enter pound cost averaging, a longer-term investment strategy designed to mitigate the risks associated with market timing. By making regular contributions to your investment portfolio over an extended period of time, you effectively try to smooth out the impact of market and unit price fluctuations. As a result, you buy fewer units when prices are high and more when prices are low, thus averaging out the costs over time.
One of the advantages of making regular contributions to your investment portfolio is the elimination of the risk associated with market timing. This approach removes the need to worry about making investment decisions during turbulent periods, or succumbing to behavioural biases that often arise when markets fluctuate. Psychological tendencies can lead us to feel more comfortable investing during rising markets while hesitating during market downturns.
However, attempting to time the market accurately is notoriously challenging, and even successfully selling before a market fall does not mean you will find the optimal re-entry point. Historically, despite major wars, financial crises, natural disasters, and the recent global pandemic, stock markets have demonstrated a long-term upward trajectory (although past performance is not a reliable indicator of future results). Regular investments, utilising pound cost averaging, offer a systematic approach to investing, which can help overcome emotional hurdles and reinforce a steadfast commitment to your long-term financial goals.
Investing regularly provides an opportunity to instil discipline in long-term savings goals, such as Junior ISAs, where steady contributions can accumulate into a significant sum by the time a child reaches adulthood. By setting aside whatever amount you can afford regularly, even if it seems small, you can start investing sooner and capitalise on the power of compounding over time. Remember, the duration of your investment in the stock market is one of the most influential factors determining long-term returns – so the earlier you start, the better.
It is essential, however, to strike a balance between regular investing and holding excessive cash. Although it is a good idea to always have some easy-to-access cash savings for short-term goals and any unexpected expenditure (like a new boiler or car repairs), the proportion of your overall assets kept in cash will depend on your attitude to and capacity for risk (read more about this here).
Regular investments can work well when a large lump sum investment isn’t readily available. If you have already decided to commit money regularly to the stock market, then you may wish to outline a specific timeframe for completing the investment and set your monthly contributions accordingly. Of course, anyone can adjust or pause their direct debit in light of shorter-term needs such as prioritising paying off high-cost credit and having sufficient emergency funds available.
To begin a regular investment plan with The Big Exchange, simply open a new account or log in to an existing one on our platform and select the option for regular monthly payments. Don’t forget to revisit your savings plan and time horizon to ensure that your investments align with your aspirations. You may also want to consider diversifying your investments based on different goals and risk tolerance levels. If you would like some ideas on building your portfolio, read Liz’s blog post, but you should always seek independent financial advice if you are unsure if an investment is suitable for your circumstances.
By utilising pound cost averaging as part of your investment strategy and maintaining a disciplined approach, you can position yourself for long-term financial success.
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Please remember that when investing, making money is not guaranteed and your capital is at risk. The value of your fund can go down as well as up. Tax treatment depends on an individual’s circumstances and may be subject to change.
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