Getting started with stock investing can seem like a challenging task for beginner investors. There are so many stocks and funds out there on the market. It can be challenging to know where to start. That’s why I’ve always favoured a slow and steady approach when it comes to investing.
Rather than putting a large lump sum into the market and picking a single fund or selection of stocks, I have used a process called pound cost averaging.
A different approach to stock investing
Pound cost averaging is the process of investing a little every month into the market. This can provide a significant advantage because it removes any temptation to try and time the market or sell stocks when they’re high and buy them when they’re low.
Research has shown that trying to time the market in this way can be detrimental to returns over the long term. That’s why I always avoid trying to time the market. We never know what’s around the corner, and it’s impossible to predict the future. So, why waste my time and effort trying to do the impossible?
Instead, I drip-feed a lump sum of around £300 into my Stocks and Shares ISA every month. This process is entirely automated, so I don’t have to make any decisions or remember to deposit money. Once I have set up the transactions, all I need to do is sit back and let the computer take care of the rest.
Of course, this strategy might not be suitable for all investors. I am comfortable making a regular deposit because I have a steady income. Some investors may not have that luxury.
What’s more, I’m comfortable using the selection of funds my online stockbroker offers with its regular investment plan. Most online stockbrokers now offer a regular investment facility, but the opportunities can be limited. Therefore, such a strategy may not be suitable for all investors who want more flexibility with their investments.
Research has shown that stock investing can achieve mixed results in the long run. Picking individual stocks and shares requires a lot of time and effort, and most investors struggle to earn a high annual return using this approach.
Buying passive investment funds are one way to get around this issue. For example, over the past three decades, the FTSE 100 has produced an average annual total return of around 8%. All I would need to do to copy this return is buy a low-cost tracker fund.
That being said, past performance should never be used as a guide to future returns. All this example shows is that if I’d wanted to achieve an 8% annual return over the past three decades, I only needed to buy an FTSE 100 tracker. It may be possible to generate a higher return buying single stocks, but that’s not guaranteed, as I mentioned above.
As stock investing requires so much time and effort, this is a strategy I plan to use going forward for my Stocks and Shares ISA. It might not be the best approach, but I think a pound cost averaging strategy could work for me.
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Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.