What is pound cost averaging? The basics

Markets don’t move in straight lines. They rise and fall - sometimes sharply - making it difficult to know when the ‘right’ moment is to invest.

Watching your investments drop in value can be uncomfortable. That feeling may tempt you to wait for a better time to invest - or stop altogether.

While this reaction is completely natural, trying to time the market is difficult - even for experienced investors. That’s where pound cost averaging can help.

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What is pound cost averaging?

Pound cost averaging is an approach where you invest regularly - usually each month - rather than investing a large amount all at once.

This means you keep investing even when markets are moving up and down - otherwise known as market volatility. The idea behind it is to smooth out the price you pay for your investments over time, rather than trying to pick the ‘right’ moment to invest.

Pound cost averaging can help reduce the temptation to make short-term decisions.

• Read: Invest regularly

How does pound cost averaging work?

Let’s say you have £1,200 to invest in a particular fund or share. You could either invest the full amount in one go, which is known as investing a lump sum. Or you could invest £100 a month over the year.

When you invest regularly, you’ll buy that investment at different prices. Sometimes you’ll pay more, sometimes you’ll pay less. It depends on the market.

But if you invest a lump sum, prices could fall straight after you invest. So, by spreading when you buy your investments, you reduce the risk associated with timing.

How it works in practice

The examples below are based on illustrative scenarios, not real market returns. Investment values can fall as well as rise and so outcomes can be different depending on market conditions. Charges would also apply and reduce any returns.

In each scenario, both investors have £12,000 to invest over the year. The difference is that one regularly invests £1,000 each month, while the other invests it all in one go. 

• In a rising market

Where investment prices move up and down during the year but end higher, investing a lump sum early can lead to better results. In this scenario, Dan invests all £12,000 at the beginning of the year when prices are lowest and makes £3,120. This is £2,038 more than Shandia, who invests monthly.

• In a flat market

Where prices fluctuate but end the year at roughly the same level, regular investing can sometimes work in your favour. Trish invests £1,000 each month and buys investments at a range of prices that average out lower than the price Andrew paid when investing his lump sum. As a result, her investments are worth £1,977 more by the end of the year.

Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Eligibility to invest in an ISA and tax treatment depends on personal circumstances and all tax rules may change in the future. Withdrawals from a pension product will not be possible until you reach age 55 (57 from 2028). This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.