Taking the sting out of a volatile market

Mar 19 2008 By The Journal

REGULAR investing could be a less volatile strategy for our longer-term wealth, as anyone investing in the stock markets will have natural concerns about short-term market fluctuations.

The only thing we can be certain about is that there is no way to predict what direction the markets will move in – either on a day to day or longer term basis.

Stock markets will always witness times of growth and decline in the shorter term.

This ‘volatility’ can often be significant and was particularly prevalent in the aftermath of 9/11 and the Iraqi conflict. However, history has demonstrated that over the longer-term, equity markets do out perform all other asset classes. As investors we need to ignore the ups and downs and look at the broader picture.

The term ‘pound cost averaging’ is used when investors make regular (normally monthly) contributions into equity-based investments, such as shares, or a particular fund.

The result is that, whilst there may be dips in the market, the investor will benefit from the potentially larger rises that might be round the corner.

Looking from the outside, a fall in the market might be seen as a huge negative and, as a result, an inexperienced investor might be worried.

However, investing small amounts on a regular basis means that each contribution will purchase more shares or units for a portfolio.

When prices are high you will be buying fewer shares or units, however, by making regular contributions this means that the average price paid for each unit or share, will be lower than the arithmetical average of the market price.

Pound cost averaging takes a great deal of worry out of the typical investment dilemmas that investors might face.

We should all bear in mind that committing funds on a regular basis means not investing all savings when prices might be at a premium. The more the market swings the greater the benefit to somebody using pound cost averaging.

It is certainly no secret that this strategy of investment will mean you would lose out on the best of the growth in a rising market.

Nevertheless, investors can be safe in the knowledge that pound cost averaging is a long-standing method of growing investment capital during the ups and downs that markets can experience.

For further information about regular investment vehicles, contact ACA Financial Services; member of the St James’s Place Partnership on 08451 303084.

www.sjpp.co.uk/aca/