The conflict in Ukraine is still unresolved 18 months down the line, inflation, whilst slowing, is still with us, the cost of living and everything associated with it still seems to be rising, and we hear that many businesses are struggling and that’s all before we have felt the full force of Brexit.
The bad news tends to outweigh the good news and we could all be forgiven for wondering if there is an end in sight.
There’s inevitably a degree of apprehension about what the future holds and whether the powers that be have the ability to change the course of the economy and ultimately provide some, just a few, signs of a feel-good factor.
Well, yes, there are indeed some signs that things are settling down, even just a bit.
Inflation is falling, lenders have begun reducing mortgage rates, and it seems the predicted peak of base interest rates was a little pessimistic.
So what does this have to do with savings or investments? Well, the world does remain uncertain and volatile, and consequently, so do financial markets.
And for those who do have the means to invest and save are constantly looking to both protect what they have and try and achieve reasonable returns or growth, or both.
Now we’d all like the buy low, sell high, and make bundles without any hint of risk. Reality? Not really.
Actually, it’s in times like these that a strategy of long-term regular saving comes into its own and holds significant importance, particularly when it comes to mitigating volatility in investments.
One key technique that underpins this strategy is known as pound cost averaging.
Financial markets are inherently unpredictable, more so in the short term, and are subject to fluctuations related to economic events, geopolitical factors, and investor sentiment.
Sudden market swings can lead to substantial losses for investors who try to time their investments based on short-term market trends. It’s not for the faint-hearted.
In contrast, long-term regular saving encourages investors to focus on their financial goals over an extended period rather than reacting to short-term market movements.
By adopting a long-term perspective, investors can benefit from the power of compounding, where gains from investments generate additional returns over time.
Regular contributions to investment accounts ensure a consistent (and more affordable) flow of funds into the market, regardless of its current state. This approach reduces the impact of market timing and helps avoid making emotional decisions during market fluctuations.
Pound cost averaging is a strategy that involves investing a fixed amount of money at regular intervals, regardless of market conditions.
When prices are low, investors purchase more shares, when prices are high, they buy fewer. Over time, this strategy averages out the cost of shares purchased, potentially leading to better overall prices.
Timing the market, as many people have found out to their cost over the years, is extremely challenging, even for very experienced investors. However, regular saving through pound cost averaging minimises the risk associated with trying to predict market highs and lows.
As we all know (because we are currently experiencing one!) economies tend to run in cycles, and long-term regular saving aligns with the ups and downs of these cycles. Investors can take advantage of the potential for higher returns during economic upturns whilst still accumulating assets during downturns.
Ok, so long-term regular saving and pound cost averaging don’t sound too sexy. Well, they’re not, but they are a well-established option for investors.
And whilst this approach may not be suitable for everyone, it can form part of a carefully considered financial plan. And of course, any financial plan will depend on your individual circumstances.
The first thing to remember is that investing is not an exact science and it is equally important to plan for downturns as well as positive returns.
There are no right or wrong decisions when it comes to investing, only decisions that meet your specific needs. And for those who don’t do it for a job, seeking independent financial advice should be your first stop.
The value of your investments can go down as well as up, so you could get back less than you invested. Past performance is not a reliable indicator of future performance.
Based on tax legislation at the time of publication. Please be aware that there will have been changes since this was published. Speak to your adviser for the most up to date information.
