Pound-cost averaging

Dunney77

Does this work better than investing a lump sum?

Invested a lump sum just before the recent crash (although it has now regained to about 0% +/-)

chockydavid1983

What it will do will get you the average return over the period of investment.
Investing a lump sum can do very well or very badly in comparison.

CLAPTON

Dunney77 wrote: »

Does this work better than investing a lump sum?

Invested a lump sum just before the recent crash (although it has now regained to about 0% +/-)

best to invest a large lump sum at the very bottom of the market

and then to sell at the next top

and then to buy back at the next bottom

etc etc

however not everyone succeeds in doing that

ColdIron

Historically over the long term lump sum generally gives better returns, partly because you have more invested for longer (think dividends)

Over short timescales drip feeding will mitigate volatility and in downturns this provides a feel good factor especially for novice investors

dunstonh

Does this work better than investing a lump sum?

Yes and no. There will be periods when it works better and periods when it does not. However, statistically, the lump sum will result in the higher value on more occasions than the pound cost averaged value. This is because growth periods outnumber negative periods and you may miss dividend distribution dates.

EdGasket

Hard to believe but bunging the lot in appears to work out best; see here:

http://www.morningstar.co.uk/uk/news/96177/is-pound-cost-averaging-overrated.aspx

bowlhead99

EdGasket wrote: »

Hard to believe but bunging the lot in appears to work out best; see here:

http://www.morningstar.co.uk/uk/news/96177/is-pound-cost-averaging-overrated.aspx

It's not particularly hard to believe

Investments pay dividends and investments grow in value over time and the combination of those gives a return superior to holding cash over the long term.

If you have £x of money to invest right now, but choose to slowly drip into your investment of choice, you will get the returns of mostly-cash-and-a-tiny-bit-of-investment in month one, and the returns of mostly-cash-and-two-tiny-bits-of-investments in month two and so on and so on until you gradually reduce the cash and eventually end up with the investments that you actually want.

As the returns from investments are well accepted to be statistically better than cash, which is the whole reason you are moving out of cash and into investments in the first place, it can't possibly be better (on average) to delay investing and have more cash for longer.

So, I'm not sure if 'hard to believe' was sarcastic (as it's hard to tell from written forum comments sometimes), but clearly it's not hard to see why buying investments with your money gives better returns than not buying investments yet and instead putting off most of the investing until some later week or month or year.

If you had a very big lump of money to invest that had come out of nowhere and you were deciding whether you should suddenly flip it from super-safe cash to super-risky equity investments, you might well be nervous about a potential drop in the value of your new-found wealth next week. In which case, maybe you should look at more cautious investments, rather than buying super-risky equities now or drip-feeding super-risky equities over a year.

At some point if you were drip feeding you will own all of what you set out to buy - maybe if you started now you'd own it by September 2016. And then there could be a drop the very next day after that. But at least if you had invested the money in September 2015 you would have a year's worth of growth to be able to better-afford the drop.

If you are spending an annual ISA allowance as mentioned in the article - then putting your money into the market on day 1, rather than putting it in on average on day 182, will give it more time to grow... and if you do that every single year you will have a whole decade's worth of money that's all had six months more growth on it. That's a lot of returns to turn down, in the name of 'caution'. Of course, if the share prices are going down rather than up in the period after each investment, you could have bought your investment cheaper, but we're not expected to be psychic.

If you are cautious and believe in drip feeding then investing one lump sum on 6 April every year will give you the 'advantages' of pound cost averaging across the decade, because you have done it in ten large drips.

EdGasket

The 'hard to believe' wasn't sarcastic; it's just that with the market trading sideways for the past 15 years, i.e. no growth, I would expect pound-cost averaging to do better unless you happen to time the market right. My pension performance has been dismal over the past 10 years and S&S ISA pretty dismal and they have been fully invested.

Thrugelmir

EdGasket wrote: »

My pension performance has been dismal over the past 10 years and S&S ISA pretty dismal and they have been fully invested.

Wrong choice of funds?

bowlhead99

EdGasket wrote: »

The 'hard to believe' wasn't sarcastic; it's just that with the market trading sideways for the past 15 years, i.e. no growth, I would expect pound-cost averaging to do better unless you happen to time the market right. My pension performance has been dismal over the past 10 years and S&S ISA pretty dismal and they have been fully invested.

Mine has done OK so I guess it depends which markets you're looking at. Even if markets were spending half the time above £100 per share and half below £100 per share in each and every year, there would be no expectation that drip-feeding and having lots of purchase dates would outperform investing one lump sum on a haphazardly chosen date. (ignoring missed dividends and missed bank interest income from following one route over the other).

But you think drip feeding would "do better" which is intriguing because the only way that works is if that the money which is not in the investment is consistently getting a better return than the investment.

Dunney77

What about for funds which don't really pay dividends (e.g. vanguard life strategy)?