In the current climate, where the news shows us that more than a million people globally have contracted the coronavirus, it can be difficult to be positive.
This is especially true where your investments are concerned. Between 24th February and 23rd March 2020, the FTSE 100 index fell by around 30%. You have to go back to the global financial crisis of 2008/09 to see the index sitting at this level. Other global markets have experienced similar falls and all major markets are experiencing extreme volatility with significant positive and negative movements daily.
Of course, this volatility comes immediately after a time when many people were already wary of equities, thanks to the uncertainty caused by the UK’s departure from the European Union. You may well have been holding onto cash for a while now in anticipation of Brexit.
Investing in uncertain times
It is sometimes said that the stock market goes up the escalator but comes down in the lift. On 12th March this year, the FTSE 100 index dropped more than 10% in its worst day since 1987. In the US, the Dow and S&P 500 were also hit by their steepest daily falls since the same year.
But some experts believe that the current situation may offer opportunities for investors looking to get back into the market after three years of Brexit uncertainty.
Writing in the Telegraph, Tom Stevenson, investment director at Fidelity International, writes that “The best time to invest is not when you see light at the end of the tunnel but when the darkness is a shade less black.” But no one is sure quite how much further markets might fall, so thinking of investing a lump sum now might rightly make you nervous.
How pound-cost averaging can help you take a long-term view
So, when can an investor commit money to the market? There are typically three options:
- Invest it all immediately, and invest the rest as it is earned
- Save it up, and invest a larger sum all in one go when the market conditions are right
- Stagger it, and invest the money gradually over time
The third approach – investing a sum of money over a period of time, rather than all at once – is known as ‘pound-cost averaging’.
Imagine an individual invested £100,000 into a diversified portfolio. If the market falls consistently over 12 months, she might be left with a total portfolio of just £90,000. Her investment has reduced in value by 10% and she will have to grow her £90,000 by more than 11% to recover her portfolio’s initial value.
Compare that with a pound-cost averaging strategy.
Here, an individual invests £10,000 each month. As the market falls in value, it becomes possible to buy more assets at the lower price. In addition, assets invested later spend less time in the falling market.
Pound-cost averaging can work well in a falling market for the reasons above. Of course, if markets start to recover then an investor will be worse off than if they had invested your entire lump sum in one go. But, in a highly volatile market where markets are at their lowest for a decade, it can allow investors to get back into the market by spreading some risk.
The importance of having a plan
The most important thing you can have right now is a plan in place to reap any potential rewards if and when the market begins to recover.
Get in touch to find out how our advisers can help you. Email firstname.lastname@example.org or call 020 3828 8100.
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.