Glossary · UK
What is Pound-Cost Averaging?
Investing a fixed amount at regular intervals rather than a lump sum, so more units are bought when prices are low and fewer when prices are high, smoothing the average purchase price over time.
Full Definition
Pound-cost averaging (the UK term for what is called dollar-cost averaging in the US) is the practice of investing a fixed sum of money at regular intervals -- for example a set amount into a Stocks and Shares ISA or pension every month -- rather than investing a large lump sum all at once. Because the fixed payment buys more units, shares or fund holdings when the price is low and fewer when the price is high, the average price paid per unit over time is smoothed out, which can reduce the risk of investing a large lump sum right before a market fall. Pound-cost averaging is less a deliberate investment strategy in itself and more a natural consequence of how most people actually invest -- through monthly pension contributions, workplace auto-enrolment, or regular savings plans into an ISA -- since few people have a large lump sum available to invest all at once. Academic and industry research generally finds that, for someone who already has a lump sum available, investing it all immediately tends to produce a higher expected return over the long run than staggering it in, simply because markets rise more often than they fall, but pound-cost averaging can still suit investors who value the smoother ride and reduced regret risk over a marginally higher expected return.