Pound cost averaging: why you should drip feed money into your stocks and shares ISA

Pound cost averaging is an investment strategy that takes the emotion – and guesswork – out investment,

This approach involves drip-feeding money in your investment portfolio Investing on a regular basis, usually monthly, rather than investing in a lump sum all at once.

The logic is simple: by investing at regular intervalsYou spread your stock purchases across both rising and falling markets.

This will allow your average share cost to even out over time, so you don’t have to worry about events outside your control.

How does pound-cost averaging work?

With pound cost averaging, you are not trying to time the market, or predict when share prices will rise or fall.

Investing the same amount regularly means you will automatically buy more shares More when prices are low and less when prices are higher. Over time, this can reduce your average cost per share.

Here is an example. Let’s say you decide to invest £200 every month. In the first month, you can get 20 shares at £10 each. Next month, if the price falls to £5, you will get 40 shares. So, you would have 60 shares for £400, which means an average cost of £6.67 per share.

Sarah Coles, personal finance expert at Hargreaves Lansdown, says: “If you put in a lump sum, the risk is that you’ll pick a bad time, just before the market falls.

“However, if you invest monthly, you will take some of your money when the markets are rising, and some when they are falling, so your money will grow further. This way, when they recover again, you benefit from those gains.”

fellowship benefits

global stock market There has been turmoil for the last few years. Rising inflation and changing interest rate expectations have kept investors nervous, while geopolitical tensions and changes in US trade policies have added to the uncertainty.

Additionally, high valuations in fast-growing sectors like technology and AI have made prices more sensitive to earnings news and headlines.

Together, these factors have caused the market to experience frequent fluctuations rather than smooth growth.

Jason Hollands, managing director of BestInvest, says: “One of the biggest things that stops people investing is the fear of getting the timing wrong. The idea of ​​putting a lump sum of hard-earned money into the share market and subsequently seeing share prices fall dramatically, can be a real deterrent to taking any action.

“Pound cost averaging, which essentially means investing regularly, is a great way to allay these fears.”

How to set pound cost averaging

Pound cost averaging occurs naturally with workplace pension contributions because you are investing the same amount over a regular period of time – usually every month when you are paid.

To establish the pound cost average for shares And share ISAs, start by choosing an ISA provider with low fees and simple automatic investing.

There is a £20,000 ISA contribution limit each year for each individual – divided monthly, this means a maximum monthly contribution of £1666.67. In practice, most people can’t afford to invest this amount every month – but even £100 or so is worth investing.

You can set up a direct debit for the amount of your choosing.

You’ll need to decide which funds you want to invest in and arrange for your ISA provider to invest your money in your chosen investments.

Making investment more accessible

A major advantage of pound cost averaging is accessibility. Many people believe that investing requires large amounts of money – but dripping cash proves otherwise.

Even small monthly contributions There could be a lot of growth over the years thanks to compounding,

For new investors, the pound’s average cost lowers the psychological barrier to entry as you don’t need to pick the right time or accumulate a large lump sum.

“The average cost of the pound keeps you going,” says Hollands, “both during good times when optimism is abundant but share prices can be expensive, but also periods of uncertainty or a falling market when you might otherwise feel less inclined to invest – but in reality these periods represent an opportunity to increase investment at lower prices.”

“Pound-cost averaging, therefore, can help remove the pull of emotional factors from investing and instead turn it into a discipline.”

It’s important to stay the course

Putting money into investments works best when you are committed through tough times. This means keeping on investing even when the market is falling and you’re losing money in your ISA or pension.

Although it may seem counterintuitive, these are the moments that often fuel your strongest returns later on.

After all, stock market fluctuations are normal. A regular investment plan averages prices over time, capturing the market’s long-term upward trend – but without the stress of trying to time every move.

When investing, your capital is at risk and you may get back less than you invested. Past performance does not guarantee future results.