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How regular investing can help you navigate volatility

Anyone looking to invest right now will be confronted with a degree of uncertainty. We’re in the midst of market volatility caused primarily by a combination of high inflation and the ongoing crisis in Ukraine. With Central Banks raising interest rates to combat the inflationary pressure, financial markets have had a rocky time since the start of 2022. 

For investors, there may be some volatility still to come. Inflation is showing little sign of slowing and the war in Ukraine is still without resolution. Going forward, we may see fewer dramatic movements than we have seen so far in 2022, but there’s always the chance things will remain choppy before they eventually settle. In these situations, it’s often slow and steady that wins the race.

Our service allows investors to drip-feed funds into an account to bolster their long-term growth. It’s important to remember that timing the market is essentially impossible to do. Stopping investing altogether, however, can cause you to lose ground on your long-term goals. Drip-feeding cash into the markers can help navigate volatile periods by staggering your points of entry into the markets. No one knows exactly when the market reaches the “bottom” but, through regular investing, you can be there when it does. 

Investing slower and smarter

By investing little and often, you can negate the difficulty and risk inherent in timing the market, because it’s not the goal. Where timing the market requires near-superhuman foresight, the goal here is to continue investing while avoiding market speculation and ironing out the fluctuations in an asset’s price over time. 

No one wants to buy at the top of the market. Equally, no one wants to miss out on further bargains if the market drops even further than what you might perceive to be the bottom. So, rather than the entire investment portfolio taking on a loss or feeling the burn of a missed opportunity, pound cost averaging means only that month’s investment does, for example. The rest can then be regularly invested at the lower prices. 

A pound cost averaging strategy means that the most difficult decision you need to make is how much and how often you want to invest. Setting up a direct debit to take care of the transfer makes the process even easier. The flexibility that comes with ‘little and often’ payments means that, without committing a large chunk of cash at any one time, you can change the direction of your portfolio building without having a detrimental impact on the investments made so far. 

Ideal for uncertain times

The situation in the markets at present could be best described as ‘uncertain’. It is only natural, then, that sensible investors would want to mitigate the risk they take on when putting money away. We have written extensively about the ineffectiveness of holding cash in times like these, particularly when inflation is this high, which means navigating the markets safely is the best option for most savers. 

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Human beings are naturally risk-averse, particularly when getting started with investing. Pound cost averaging means smoothing out the volatility and avoiding investing heavily at the peak of the market. When markets go up, what you already have invested will too; when they go down, your next regular investment buys more. 

There are fears that inflation could keep rising this year and peak at the end of 2022, before beginning to come down next year. It’s also unclear how the situation in Ukraine will develop, so it’s only natural that investors may want to avoid jumping in at the deep end of the markets. 

Set up regular top ups

 

How does regular investing work?

If you’re lucky enough to be presented with a lump sum to invest at any point in your life, deciding how to use it is significant. People will often say that the most sensible thing to do with a lump sum is to ‘invest it’, but there’s more than one way to do that. You can either invest it in one or more lump sums or drip-feed it into the market over an extended period of time. 

We call the latter ‘pound cost averaging’. This is a technique where you make investments on a regular basis and therefore average the price you pay for the total investment over time. Most investment instruments – including ETFs – are available for purchase through regular savings plans (like ISA schemes), which allows investors to top up on a regular basis. 

Get started with regular top ups

We’ve made pound cost averaging a part of our investment service. For anyone that favours a disciplined, regular investment pattern that fits with their income and long-term plans, drip-feeding into an account can effectively take the emotion and speculation out of investing. We’ll still be actively managing investments and seeking out areas of potential opportunity, but you won’t be making any single defining decision about your investments. 

Of course, as with all investing, pound cost averaging carries its own risks and there is no guarantee it’s the superior option. However, for anyone looking to navigate potentially choppy waters ahead through a careful, tried and tested investment strategy, it is certainly worth considering it as an option. 

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