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

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.

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.”

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.

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.”

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.