What is pound cost averaging?
If you have a lump sum of money, it can be hard to know where to start. This article explores pound cost averaging - the option of investing little and often.
When you’re deciding how to invest, you have two options:
- Invest it all at once and hope that the market performs consistently well so your investment increases month on month.
- Drip feed that lump sum into your investment pot with regular payments over the course of a few weeks, months or years.
The idea of pound cost averaging is to make regular contributions to your investments to try and smooth out the ups and downs of the market. There are no guarantees with this approach as the value of all investments can go down as well as up.
In this video, Donato Boccardi, Head of Investments for Consumer Wealth at Aviva, explains what pound cost averaging is and how it works as a way to invest regularly over time. Learn how this approach can help to smooth out market ups and downs and support a long‑term investing strategy.
Active vs Passive investing
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Chapter 2:
What is pound cost averaging?
This video is for educational purposes only. This should not be viewed as advice or a recommendation to invest.
When you start investing and the question becomes, how much should I invest? You've got two choices. Go all-in or drip feed your money over time. The second approach is called pound-cost averaging.
It's about investing little and often to try and smooth out the ups and downs of the market.
The value of all investments can go down as well as up, and you could get back less than what you’ve paid in.
There are no guarantees with this approach, but it can help you remove some of the intimidation of investing by focussing on consistency over time.
This chart shows how pound-cost averaging works. For example, the price of this asset moves up and down during the year, from £6, up to £8, up to £10, down to £4 and then up to £7. By investing the same amount regularly, you don't have to guess the best time to invest.
Sometimes your money buys more units, sometimes fewer, depending on the price of the asset at the point of the year. Over time, this gives you an average cost. In this example, £7, that helps you smooth out the ups and downs of the asset.
I use this approach myself when setting up my SIPP. It helps me stay consistent by investing regularly, especially during volatile periods, like early 2020. Pound-cost averaging, like any investment strategy, comes with its pros and cons.
Let's start with the positives. When you invest regularly, say monthly, you're spreading your money across different market conditions. That means you're not putting everything in when prices are high, which helps smooth out the ups and downs over time.
If the market dips, you're buying shares at a lower price, and when it recovers, those cheaper shares could give you a better return. It's a strategy that can really help in volatile markets. It's also a great way to ease into investing.
If you're just starting out, putting in a little at a time feels a lot less daunting than making one big decision. It takes the pressure off and helps you build confidence. And there's another benefit.
It builds good habits. You're investing consistently, sticking to a routine, and letting time do the heavy lifting. Little and often really adds up.
That's exactly how our workplace pensions work, for example. Regular contributions, consistency, and time do the heavy lifting for you. It's pound-cost averaging in action, and it's one of the reasons why pensions remain one of the most powerful ways to invest for your future.
On the other side, if markets are rising steadily, putting in a lump sum right at the start might actually help give you better returns than spreading things out.
Investment insight: Stick to a plan and avoid the temptation to time the market. Or, set a fixed monthly amount you can afford.
And if you've got money sitting on the sidelines waiting to be invested, inflation can chip away at its value. Things get more expensive while your money just sits there, so having a clear plan and time frame is key.
So, to bring it all together, staying consistent beats chasing the perfect timing. Even something as simple as a fixed monthly contribution can go a long way over time.
This video is for educational purposes only. This should not be viewed as advice or recommendation to invest. Investing offers the potential for better returns than cash savings over the long term (5+ years).
But there are risks, the value of your investments may go down as well as up, and you may get back less than invested. If you want advice on investment choices, then we’d recommend speaking to a financial adviser. There may be a charge for advice.
This video is part of our wider Each chapter is designed to work alone, so you can jump in wherever you like.
A simple example of pound cost averaging
The graph above shows how the price of an asset changes throughout the year, with key points marked from January to November. In this example, prices range from £4 to £10, and the average purchase price over the year is £7. This shows how pound cost averaging, a strategy where you invest regularly, no matter the price, can help average out the cost over time.
The good bits
Smoothing out the ups and downs
The logic behind pound cost averaging is that some months, if the market is doing well, shares may be worth more, but it means they're more expensive to buy. But if the market isn’t doing so well, shares will be cheaper. So, if you buy a few shares every month, the idea is that the cost will average out over time.
Volatile times
Pound cost averaging could also help investors when the market is volatile. If markets fall you would be buying shares at a cheaper price – so you’ll hopefully get a bigger return on these once the market picks up again.
Less daunting
If you’re nervous about putting all your eggs in the same basket at once, pound cost averaging can be a useful way to overcome that emotional hurdle.
Good behaviour
Importantly, pound cost averaging can create a more disciplined investment approach. It can be good practice to invest little and often, for the long term.
The not-so good bits
The good times
The obvious question surrounding pound cost averaging is: what happens when the market goes up? The answer: you end up buying shares at increasing prices. In this case, investing a sum of money from the start would mean you bought all your shares at the lower price, which could potentially mean a higher return over the longer term.
Cash isn’t always king
It’s important to remember that any money you don’t invest will be kept as cash. And, if you keep your money in cash for a very long time, you may even lose money, thanks to inflation. So if you choose to pound cost average, it’s a good idea to set yourself a timeframe to invest in.
In it to win it
Ultimately, if you want to see a return on investment, over and above what the current bank or building society rates can offer you, investing can help you to do this. And pound cost averaging could be one way to feel comfortable doing that.
As with all investments, remember your money is at risk and you may get back less than invested. So take time to do your research and get some financial advice if you're unsure of what to do.
Put pound cost averaging into practice
Setting up a regular investment is a good way to automate pound cost averaging with your accounts. But remember, there’s no guarantee it will give you a better outcome than investing a lump sum.
See all the ways you can invest with us through our online investing platform.
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