Pound cost averaging: Why you should drip feed cash into your stocks and shares ISA

You shouldn’t worry about trying to time stock markets - and this strategy means you don’t have to

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Pound cost averaging is an investment strategy that takes the emotion – and guesswork – out of investing.

This approach involves drip-feeding money into your investment portfolio on a regular basis, usually monthly, instead of investing a lump sum in one go.

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

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

How pound-cost averaging works

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

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

Here’s an example. Say, you decide to invest £200 every month. The first month, you might get 20 shares at £10 each. The next month, if the price drops to £5, you’ll get 40 shares. So, you end up with 60 shares for £400, meaning an average cost of £6.67 per share.

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

“However, if you invest monthly, some of your money will go in when markets are rising, and some will go in when they have fallen, so your money goes further. That way, when they recover again, you benefit from those gains.”

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Consistency pays off

Global stock markets have been choppy over the past couple of years. Rising inflation and changing interest rate expectations have kept investors nervous, while geopolitical tensions and shifting US trade policies have added to the uncertainty.

At the same time, high valuations in fast-growing areas like tech and AI have made prices more sensitive to earnings news and headlines.

Together, these factors have led to frequent market ups and downs rather than a smooth rise.

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Jason Hollands, managing director of BestInvest, says: “One of the biggest things that deters people from investing is the fear of getting the timing wrong. The thought of ploughing a hard-earned lump sum of money into the stock market only to subsequently see a subsequent dramatic slide in share prices, can be a real deterrent to acting at all.

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

How to set up pound cost averaging

Pound cost averaging naturally happens with workplace pension contributions because you’re investing the same amount on a regular schedule – usually every month when you’re paid.

To set up pound cost averaging for a stocks and shares ISA, start by choosing an ISA provider with low fees and simple automated investing.

Everyone has a £20,000 ISA contribution limit each year – split monthly, this means a maximum monthly contribution of £1666.67. In practice, most people can’t afford to invest this amount each month – but even £100 or so is worthwhile.

You can set up a direct debit for your chosen amount.

You’ll need to decide which fund(s) you want to invest in and arrange for your ISA provider to invest your money into your chosen investment.

Making investing more accessible

One major benefit of pound cost averaging is accessibility. Many people believe investing requires a large pot of money – but drip-feeding cash proves otherwise.

Even small monthly contributions can grow substantially over the years thanks to compounding.

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For new investors, pound cost averaging lowers the psychological barrier to entry as you don’t need to pick the perfect moment or gather a sizeable lump sum.

“Pound cost averaging keeps you going steadily, through both the good times when optimism abound but share prices might be expensive, but also periods of uncertainty or falling markets when you might otherwise feel less inclined to invest - but actually these periods represent an opportunity to scoop up investments at lower prices,” adds Hollands.

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

Staying the course is key

Drip-feeding money into investments works best when you commit through thick and thin. That means continuing to invest even when markets are falling and your ISA or pension appears to be losing money.

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

Ultimately, stock market ups and downs are normal. A regular investing plan averages out 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 invested. Past performance doesn’t guarantee future results.