Pound Cost Averaging
Plain-English definition of Pound Cost Averaging — part of our investing glossary.
Definition
Investing a fixed amount at regular intervals regardless of price, rather than investing a lump sum at one time. Reduces timing risk at the cost of slightly lower expected returns if markets trend upward (which they usually do over long periods).
Worked example
Investing £500/month for 12 months into a fund that ends where it started but dropped 20% mid-year: you end up with more units than if you had lump-summed at January prices, because the low months bought cheaper units.
Why it matters
Investing is unusually unforgiving of vocabulary gaps. Costs compound, inflation compounds, and the gap between a "5% return" and a "5% real return after 0.3% fees" is the difference between a comfortable retirement and a tight one.
Common mistake
Focusing on nominal returns and headline past performance rather than fees, tax wrappers, and real (post-inflation) returns. A cheap tracker inside an ISA almost always beats an expensive active fund in a taxable account over 20+ years.
Calculators that use this concept
See also
- Compound Interest — Compound interest is interest earned on both the original principal and on previously earned interest. Over sh…
- Gilt (UK Government Bond) — A gilt is a UK government-issued bond. Short-dated gilts are generally considered one of the safest investment…
- CPI Inflation — The Consumer Prices Index measures the average change in prices of a representative basket of UK goods and ser…
- Real vs Nominal Return — A nominal return is the headline investment return. A real return is the nominal return minus inflation. A 7% …
- Expense Ratio (OCF/TER) — The annual cost of holding a fund, expressed as a percentage of assets. A 0.2% expense ratio on £100,000 is £2…