Adding regularly to your investments and reinvesting dividends can help protect you from market dips and allow you to benefit from compound interest.
There are plenty of reasons to avoid investing at the moment. Economic growth is sluggish, the pound is weak, inflation is rising, and the low base rate means that most banks are unable to offer returns of more than 1.5% on their savings accounts.
But regular investing can actually help to counteract these issues, protecting you from financial crises and allowing you to benefit from compound interest along the way.
How? Through a financial secret called ‘pound cost averaging’.
What is pound cost averaging?
Pound cost averaging works by allowing you to get more for your money when the markets are low, and less when they are trading at a high.
As we all know, the value of any investment can fall as well as rise, just as the value of the pound can fluctuate over time. After big economic and political events, like wars or elections, these fluctuations can be dramatic. For instance, on 23 June 2016, the day of the EU Referendum, one pound would have bought you $1.48. Within 24 hours it had fallen to $1.36, and by 23 June 2017 one pound was worth just $1.27 – a drop of more than 15%.
This is just one example of short to medium-term volatility, but by getting into the habit of making regular investments, you are better able to ride out the tough times, and minimise your losses in the long term. In fact, you can actually benefit from the occasional dip in your returns, as you will be able to use these moments to increase your exposure to your investment of choice; a move which should pay off later when the market rises again.
Long-term regular investing helps to smooth out any kinks in the stock market or property market, by averaging out your returns over time. This means that you won’t have the stress of watching your life savings drop in value one day, before rising again the next. It also means that you can confidently withdraw your money at any time, without worrying that you are missing an imminent bounce in the market.
How do you invest regularly?
The easiest way to invest regularly is to move money over to your chosen investment provider on the day that you receive your salary – that way you won’t have time to get used to the extra cash in your account before it disappears again.
If you are offered the option of reinvesting your dividends, take it! By reinvesting your returns, you are essentially adding to your capital for free, and over time compound interest will make your reinvested dividends work even harder for you.
Make sure you choose an investment prospect which pays at least as much as the current rate of inflation (2.4% as per May 2018), if not higher. Any less than this and your money will be losing value in real terms.
Investing regularly with Property Partner
With Property Partner, it’s easy to regularly add to your property portfolio, so you don’t have to worry about short-term instability in the housing market. Once you’re invested, you can reinvest your dividends each month by switching the feature on for your portfolio. Find out more here.
Capital at risk. The value of your investment can go down as well as up. The Financial Services Compensation Scheme (FSCS) protects the cash held in your Property Partner account, however, the investments that you make through Property Partner are not protected by the FSCS in the event that you do not receive back the amount that you have invested. Past performance is not a reliable indicator of future performance. Gross rent, dividends and capital growth may be lower than estimated. 5 yearly exit protection or exit on platform subject to price & demand. Property Partner does not provide tax or investment advice and any general information is provided to help you make your own informed decisions. Customers are advised to obtain appropriate tax or investment advice where necessary. Please read Key Risks before investing.