How pound-cost averaging can smooth your returns

This tried-and-true investment method helps investors navigate volatile markets

David Kathman, CFA 8 April, 2009 | 1:08PM

The market volatility of the past two years has left a lot of investors badly shaken. Even though stocks have rebounded significantly from the lows they hit in early March, just about everybody has lost a lot of money over the past year, and there's still plenty of uncertainty over whether the market has really hit bottom. Many people have retreated into low-risk investments such as Government bonds or cash while waiting out the market storm.

If you've stayed invested in the stock market, either directly or through funds, it's natural to be looking for ways to smooth out your portfolio's returns going forward. And if you've retreated to the sidelines, you may be wondering if now is a good time to get back in. One way for both sets of investors to achieve peace of mind is through pound-cost averaging, a simple, time-tested method for controlling risk over time. We've mentioned pound-cost averaging before in passing (for example, here), but it's a topic worth revisiting in light of the market's recent gyrations.

How it works

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The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

About Author

David Kathman, CFA  David Kathman, CFA, is a senior fund analyst with Morningstar.

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