Imagine you’re following a recipe that calls for adding a spoonful of ingredients every five minutes. Whether you’re using a tablespoon or a dessert spoon, the principle remains the same—it’s just the measuring tool that differs. This is exactly how pound-cost averaging and dollar-cost averaging work in investing.
These two strategies are identical twins raised in different countries. While pound-cost averaging speaks with a British accent and works with sterling, its American sibling, dollar-cost averaging, deals in greenbacks.
Let’s bring this to life with some real-world scenarios:
Meet Sarah from London. She’s set up a monthly £200 investment into a FTSE 100 index fund. In January, when shares cost £50 each, her £200 buys 4 shares. February sees a market dip, with shares at £40—suddenly her same £200 snags 5 shares. When March brings a rally to £60 per share, she gets 3.33 shares. Without trying to outsmart the market, Sarah’s steadily building her portfolio.
Meanwhile in New York, Mike follows the same strategy with $200 monthly investments in the S&P 500. As stock prices dance up and down, his fixed-dollar investment automatically buys more shares when prices fall and fewer when they rise—just like Sarah, but in dollars.
What makes these strategies brilliant is their psychological advantage. Rather than agonising over whether it’s the ‘perfect’ time to invest, you’re effectively spreading your risk across time. It’s like crossing a stream by stepping on multiple stones rather than attempting one giant leap.
The beauty lies in its simplicity: whether you’re working with pounds or dollars, you’re harnessing the same powerful principle—consistent investing regardless of market conditions. The only real difference is which currency symbol appears before the numbers.
Remember: It’s not about timing the market, but time in the market. Whether you’re counting in pounds or dollars, the strategy helps you stay steady during market ups and downs while maintaining your long-term investment discipline.
Pound-Cost Averaging Examples
Frequently Asked Questions
Is pound-cost averaging still effective if I can only invest small amounts?
Yes, even small regular investments can be effective with pound-cost averaging. Many UK investment platforms allow you to start from as little as £25 per month. The key is consistency rather than amount. Over time, even modest contributions can benefit from compound interest and market growth.
What happens if I need to skip a month of pound-cost averaging?
Missing occasional investments won’t derail your strategy. While consistent investing is ideal, life happens. You can resume your regular schedule the following month. Some investors choose to make up missed contributions when possible, while others simply continue with their next scheduled investment.
Should I use pound-cost averaging for both shares and funds?
You can use this strategy for any investment vehicle. However, it’s particularly well-suited for funds because they typically have lower transaction costs than individual shares. When buying individual shares, you need to consider whether transaction fees might eat into your returns, especially with smaller monthly amounts.
