Lump Sum Investing or Pound Cost Averaging: Which Is Best For You?
If you have a lump sum to invest, whether it’s £1,500 or £150,000, there is a key decision to make. Do you invest it all in one go or invest smaller amounts over time? It can make a big difference.
Spreading out your investment is known as pound cost averaging. This is because you are buying your investments at different prices over time and therefore invest at the average of those prices overall.
It’s important to know the pros and cons of this approach compared to investing all in one go. So how do the two approaches compare?
The pros and cons of lump-sum investing
Many financial advisers agree that the longer your money is invested, the more chance it has to grow. There are ups and downs but, over the long term, markets tend to rise.
There is also the benefit of compound interest. This is where investment income is reinvested so it can grow too. Again, the earlier your money is invested, the more it can benefit from this.
So, if you invest all your lump sum straight away you maximise its opportunity to grow.
The key disadvantage of this approach is that all your money is at risk from day one. A significant drop in the market soon after you invest could make a serious dent in the value of your investment that may take time to recover. It’s important to consider how you would feel about this. Would it cause you stress? Or are you happy to just ride it out?
The Pros and Cons of Pound Cost Averaging
Pound cost averaging is often considered a lower risk approach and can reduce some of the worry around investing.
It’s true that your money is not invested for as long and so potential growth may be lower. But the worry about the timing of your investment goes away. If there is a significant market fall, the money you have not yet invested is protected. And your future investments may benefit from more favourable prices. So, in some situations, it can produce better returns than lump sum investing.
This approach also gives you a greater ability to react to what is happening in the market. You can slow down or speed up your instalments or change which investments you are buying.
Which Approach Is Best For You?
It’s impossible to predict which approach will deliver the best investment returns. Pound cost averaging can help if you are worried about potential falls in the value of your investment. But your money will spend more time out of the market, at risk of being eaten away by inflation.
Ultimately the decision comes down to your experience, goals, and attitude to risk.
If you are unsure of the best route for you, our financial planners can help. You can book a consultation today.
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