History shows that, for the cautious investor, one of the most effective ways of timing investment risk is to drip-feed investment, via a regular savings scheme, to take advantage of a maths-based concept known as pound-cost averaging.
As an example, if you imagine a real "up and down" share priced at 50p one month and £1 the next, alternating between the two prices over the course of a year. You could try to use your judgment (otherwise known as guessing), investing when you think the price is low and holding off, or even selling, when it is high. Not surprisingly it is difficult to get the timing right. Pound-cost averaging offers a far less stressful and, potentially, more lucrative approach.
Taking the example above, by investing £100 a month during the year you would accumulate 1,800 shares at an average price of 66.7p - considerably below the average market price of 75p. It sounds deceptively easy, but there is no deception about it. The reason pound-cost averaging works so well is that it has in-built mathematices which ensure that you buy more shares when prices are below average and fewer when they are above average.
For a change, a volatile market becomes a good market for regular saver as the more volatile the market, the greater the benefits of pound cost averaging relative to a strategy of trying to time the market. It also means your judgment and nerves can enjoy a welcome rest. There is no need to panic when the price falls, as you will be buying more units. And, since you are committing funds on a regular basis and therefore reducing risk, you needn't worry about investing all of your savings at the top of the market either.
It is in volatile markets, such as those we have been experiencing of late, that pound-cost averaging really comes into its own. The drip-feed approach can prove extremely effective if you sense the time to begin buying is near.
See our pages on Savings and Investment