Pound cost averaging in a falling market

The investment landscape in the last few months has been overshadowed by considerable uncertainty. Despite the incredible levels of fiscal spending to prevent unemployment and protect the vulnerable, financial markets have still taken a hammering and a recession is not too far away.

Amongst all the doom and gloom, the current market volatilities make investment decisions challenging. The future is uncertain, and we do not know when (or indeed IF) things will go back to normal. Interestingly, this period of economic contraction is unlike those before it because the negative growth rates have largely been caused because of the lockdown measures, rather than any economic discord. This has led to Andrew Bailey Governor of the Bank of England exclaiming that we could expect quite a sharp recovery in 2021 as social distancing measures are lifted and businesses reopen (BBC News 7/05/2020).

We are likely to see volatility for months to come and therefore where investment decisions are concerned drip-feeding an investment on a monthly basis would provide a degree of insurance against further falls whilst allowing an investor to benefit from growth as the markets recover in the longer term. For clients who have lower risk profiles and/or are wary about investing, pound cost averaging allows the investor to gradually expose themselves to investment markets and the overall volatility will be reduced in the short run whilst the bulk of the client’s assets remain in cash. Pound cost averaging is best suited to initial falls followed by longer-term increases and so could prove a lucrative strategy given the current environment.

Now is also the time to start up any monthly contributions to investments or pension contributions that your clients (and you) have been meaning to get around to.

Regular contributions to pensions and ISAs can be recommended with a lighter touch approach to suitability too and provides the opportunity to engage positively with clients at a time when there’s a lot of negativity floating about.

The views expressed in this article are opinions only and do not constitute financial advice. It is important that the adviser draws up an appropriate plan on a case by case basis and there is no guarantee the drip-feed of investments will result in greater returns. 

If you are an IFA and require Paraplanning assistance don’t hesitate to get in touch.