One of the common concerns of investing is that stock market based investments can travel in two directions; either up or down!
Whilst longer term returns from stock markets are normally favourable, returns can be hampered by investing when stock markets are at the top of the economic cycle. This problem can be eased by investing in a diversified portfolio where non-correlated investments run on different investment cycles.
It is natural for investors to find themselves worrying when markets are falling, but this is the time when Pound Cost Averaging comes alive.
So, how does Pound Cost Averaging work?
If you imagine that the unit price of an investment is £1 and you invest £100 pounds per month, this would buy you 100 units in the chosen investment. If the price of that unit falls to 80p, your £100 now buys you 125 units. So, when the market recovers and the unit price rises to £1.20, the units you bought at £1 would now be worth £120 (a 20% increase), whereas the units bought at 80p would now be worth £150 (a 50% increase)
The reality is that when stock markets are falling and the media are predicting a doomsday scenario, this is the time when you should be increasing your contributions. It’s not an easy sentiment to follow, but this is when Pound Cost Averaging really pays off.