When people talk about investing, the conversation often comes around to timing and when is the best time to enter the market, or to withdraw from the market.
Obviously, the answer is to invest when the market is at its lowest and withdraw when it is at its highest.
However, without the benefit of hindsight, no-one can predict exactly what the market will do, or when it will do it.
This can present a problem for investors; not only to decide when to invest, but also when eventually to pull their money out of the market.
This is where the benefits of ‘pound cost averaging’ – or, in laymen’s terms, regular saving – can come into play. Pound cost averaging works on the basis that putting smaller amounts of money into an investment reduces the overall risk of investing at the wrong time. Compared with sinking one large sum in a single transaction, the risk is mitigated by the fact your smaller, regular sums will buy in over a period of time at a variety of prices.
Of course, in a rising market, regular savings will underperform the growth of a single lump sum because the later investments will miss out on the increase of the early days. However, in an up-and-down or falling market, the opposite is true. Later investments will buy in at lower or alternating prices – some lower than the original price – and will therefore gain a little more when the market finally does rise.
Similarly, regular saving is a great way to build up a lump sum from nothing. A lump sum of ÂŁ5,000 is a tall order for plenty of people. However, putting aside ÂŁ100 a month from your income might be less of an issue. Then with the addition of investment growth or interest it means you could quickly build up a reasonable amount without necessarily noticing. And the longer you can leave that growing amount alone, the more impressive it potentially becomes.
When you do start regular savings, it is best to leave the pot untouched, until you reach your target savings amount goal. Otherwise if you dip into it too often, you will prevent it from building up and stunt its growth.
I believe savings is a habit that people develop over time & once you have started it becomes easier to keep the savings habit going.
If you have a loan payment that finishes, you could then add some of the monthly amount you used to pay to your regular monthly savings to help you build up a lump sum, so now you are earning interest, not paying It to someone else.
Similarly if you get a pay rise, you could put some of it away in your savings, and if you do it as soon as the pay rise happens, you are saving money you never had chance to get used to, so you are don’t have to divert the money from existing expenditure and give anything up.
Most investment products offer regular savings as an option, including Individual Savings Accounts (ISAs) and pension plans. If you are considering equities for the first time, this is also an ideal way to start – if prices fall, your regular sum will buy a greater number of units in your chosen fund, which will then generate higher proportionate gains when prices start to rise again. Moreover, the small amount you invest every month should have a minimal impact on your cashflow and your lifestyle and will also reduce your sensitivity to the short-term ups and downs of markets.
*The value of an investment and the income from it could go down as well as up
Happy saving!
