Pound cost averaging could be a good option in volatile markets

Pound cost averaging could be a good option in volatile markets

Mark Slobom, independent financial adviser, Harpenden

Mark Slobom, independent financial adviser, Harpenden

Mark Slobom, IFA, Harpenden – Is it a good time to invest in equity markets?

Wednesday 1 April, 2020

In the 2020 annual letter to his shareholders the "Oracle of Omaha", Warren Buffet, talked about the long-term benefits of holding stocks or equities. Although, he also cautioned investors with "anything can happen to stock prices tomorrow. Occasionally, there will be major drops in the market perhaps of 50% magnitude or even greater". (Warren Buffett Shareholder Letter 2020) 

We have certainly experienced significant falls in markets in recent weeks, but for the long-term investor who is able to drip-feed money into their portfolio, this can provide a great opportunity to buy funds which invest in great businesses at an attractive price. 

What does drip-feeding money into the market actually mean? 

The idea behind drip-feeding money into the market, which is also known as pound-cost averaging, is to provide some protection in periods of market weakness once money has been invested. Instead of investing a lump sum and then seeing the market fall, investments are made with a series of smaller amounts over a longer period. 

Mark Slobom, Chairman of the Lonsdale Investment Policy Committee and independent financial adviser in Harpenden said:

‘The advantage of investing through an independent financial adviser is that we can determine how much and over what time-period to invest money into your portfolio. By investing this way into a falling market, pound-cost averaging allows investors to buy funds at lower prices, whilst the remaining capital stays in cash waiting to be invested, as per the agreed investment plan. Drip-feeding money into the market can be an effective way to invest in particularly volatile markets and can reduce the fear of market timing.’

Mark Slobom, member of the Harpenden financial planning team continued:

‘It is important to understand that, by its very nature, pound-cost averaging or drip-feeding money into a portfolio will dampen both losses and gains. Therefore, investors with a greater risk tolerance might want to front-end their payments, so they put more money into their portfolio over a shorter time period. This can mean a bigger initial loss to the portfolio if the market falls but has the advantage of capturing more significant gains when the market recovers. The crucial aspect is that by working with an independent financial adviser, an investment strategy that is suitable for each individual and their circumstances can be agreed. We also recommend that you review your tax allowances before the end of the tax year.  Remember, if you still haven’t used your ISA or pension allowances for the 2019/20 tax year you will lose these benefits on 5th April 2020, so please contact your financial adviser for personalised financial advice.  Listed below is a summary of your tax allowances.’ 

Use or lose your tax benefits for 2019/20 tax year?

For the 2019/20 tax year each individual has a £20,000 ISA allowance which increases to £40,000 for a couple.  Individuals are entitled to a £40,000 pension annual allowance (can be tapered back to £10,000 for high earners but it’s also possible to carry-forward unused allowance from the past 3 years).  A CGT annual exemption of £12,000, £2,000 dividend allowance, up to £1,000 personal savings allowance and the 10% marriage allowance if eligible. 

The advantages of drip-feeding money into the market

Pound-cost averaging is an opportunity to drip-feed money into the market

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Source: Routledge 

In Summary…

To discuss the advantages of drip-feeding capital into a portfolio and how pound-cost averaging can be effectively deployed for long-term financial planning goals, please contact your Lonsdale independent financial adviser. 

Investors should be aware that past performance is not an indication of future performance, the value of investments and the income derived from them may fluctuate and you may not receive back the amount you originally invested. 

 

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