As I write this, global equity markets have slumped, wiping billions of dollars off people’s investments. Gold and oil have also fallen. There is no hiding place. However the reverse pound cost average can save the day.
This time it was caused by President Trump’s new tariffs. However, it could have been any number of things to cause the contraction. We’ve seen in the past that every so often the market responds to some adverse news, dramatically. The saying holds true “The bull climbs the stairs, whilst the bear jumps out of the window.” What this means is that share prices often rise slowly, but when they fall, they fall quickly.
This is what has happened just now, but what can you do about it? Especially if you are close to liquidating your equity assets, for instance if you are close to retiring and cashing in your pension.
Firstly, if you are nowhere near cashing in your assets, then ignore the noise and do nothing.
I however have less then six months until I can cash in my pension. What will I do? Well, here’s what I’m not going to do. I’m not going to panic because I know the markets will recover, eventually, even if I don’t know when. I’m going to keep my investments in the same funds which track global equities, because I know that in the long term these are the best performing. I will not run to cash or bonds, because then I will realise the losses. These losses are currently only paper losses. I’m not going to make them real. I will therefore use reverse pound cost averaging.
Pound cost average explained
To explain what reverse pound cost averaging is, I first need to explain what pound cost averaging is (or dollar cost averaging).
We’ve acknowledged that the stock market is one of the best places for long term investments, particularly Index Funds which track the whole of market, rather than individual stock. For instance, the FTSE 100 index tracks the index price of the top 100 UK companies. This will be less volatile than investing in single stocks, however there will still be some volatility. I.e. the share price will go up and down from day to day. It may even drop dramatically like we’ve just seen. Events like this seem to occur ever few years. However, over any given 10 – year period, the markets will go up.
Don’t try timing the market
This is all very well, but what about when you come to invest in one of these markets? Well, the saying goes “Don’t try to time the market, its time in the market that counts.” What this means is that trying to time your investment into the stock market is a fool’s errand. You need to invest and leave for the long term. The best way will use Pound Cost Averaging. If I invest a regular set amount of money every month, the short-term market fluctuations do not matter.
As the market drops, the value of my invest will drop, but I am able to buy more units or shares for the same amount. As the price goes up, I can buy less with the same amount, but the value of my whole investment has gone up. This averaging smooths out the peaks and troughs of the market, so that it follows the general long-term trend.
This is what happens when you want to invest in a market. However, what about when you want to start taking your money out of the market. This is where reverse pound cost averaging comes in.
Withdrawing your cash from an investment.
The first option is to move your investment from the relatively higher risk area of the global stock markets, into lower risk areas such as bonds or cash. In this option you are trying to time the market again, which as we saw before is extremely difficult. For instance, you may move your investment into safe cash a year before you need the money but then miss one year’s worth of equity growth. On the plus side you could avoid a market crash. Either way you are trying to predict what will happen.
The second option is to gradually take out your cash which will use reverse pound cost averaging.
How it works
The principle of reverse pound cost averaging is the same as pound cost averaging. You are aiming to smooth out the volatility of the markets. In this case instead of depositing a regular amount, consistently over time, you are now withdrawing a consistent percentage.
We will use the 4% rule aka the rule of 300. We will withdraw 4% of the value of the fund per year. This could either be done in one lump sum per year, or monthly in 300ths per month (100/4*12=300, hence the rule of 300).
The remaining 96% will grow by an average of 7% per year. Therefore, if inflation is an average or 3%, in theory your investment pot will stay at the same value and keep pace with inflation. I.e. Your pot grows by 7%, you withdraw 4% and inflation takes 3% in relative terms. (Actually the stock market grows on average 10% per year, but I’m using lower number to be safer – reference Investopedia).
Each year you will withdraw 4% and this value in £ will vary each year. If the overall value goes up in one year, you will be withdrawing more money. If it goes down you withdraw less £. Over the years on average the investment fund increases in value, whilst you withdraw the same percentage. Either way it never runs out.
I’ve also written about this in my other post The Rule of 300 – how much do you need to be Financially Independent? In this post I show you how to work out how much money you will need to save up in investments before you can retire or be financially free.
Stay Calm
In uncertain times like these, when markets are reeling and emotions run high, it’s easy to make rash decisions. But investing success is rarely about reacting to headlines—it’s about having a disciplined strategy and sticking to it. Reverse pound cost averaging offers a smart, structured way to draw down your investments without trying to outguess the market. It gives you breathing room, helping you avoid locking in losses and letting time and compounding do their work. So whether retirement is around the corner or a few years off, the message remains the same: stay calm, stay invested, and let your plan guide you through the noise.
Post Script: As I am doing my final edit on this post and preparing to publish it, one week after the event, the markets have recovered almost all of their losses!