Pound Cost Averaging

(The weekly series - Pocket Money - where I explain financial basics in fewer than 200 words. Feel free to make suggestions!)

Pound cost averaging (PCA) - also dollar cost averaging - is an investment strategy wherein you regularly invest a fixed amount of money into a particular asset over time, regardless of the asset’s price. 

When the asset price is high, the fixed amount buys fewer shares and when it’s lower it buys more. This creates a smoothing effect and helps mitigate market volatility. Whether it reduces the average cost of a share over time is debatable as you’ll be buying at both high and low prices.

For significant lump-sum investments (e.g. a lot of money or an inheritance), there’s often pressure to ‘do the right thing’ which can lead to delaying investment until the market appears ideal. But of course, the market is never perfect and we don’t know what will happen tomorrow, so PCA helps prevent emotional decision-making.

There are many benefits however: 

• Cultivates discipline by avoiding emotions influence decisions.

• Easy peasy to set up and maintain.

• Simplicity as there’s no need to analyse markets and price movements.

Love Eleanor. xxx