Regular deposits vs infrequent lumps with a cheap provider?

[Deleted User]

One of the key points I've learned in my research into investing is pound cost averaging. Or dollar cost averaging for our American brethren.

The idea being that it offers some protection from market volatility.

It kind of works as follows...

Last month, you put £100 in. The market was high at the time, so your £100 didn't buy you very much. But then bang, markets have dropped this month. You're last £100 is now only worth £50. But that's OK, because this months £100 will buy you twice as many shares as last month when the price was double what it is now. If the price recovers, then your first £100 is back to its original £100 value, and this month's is now worth £200.

[b] I welcome those that understand it better to correct me on that[/b]

So over time, you are buying at high points and low points, so on average, you're buying at the average price if that makes sense. 

Whereas buying in lumps infrequently, as I understand it, the risk is you buy at the peaks, ie the most expensive times to buy. And don't benefit from buying at the low points that will rise back up. 

norsefox

Beardybaldy said:

One of the key points I've learned in my research into investing is pound cost averaging. Or dollar cost averaging for our American brethren.

The idea being that it offers some protection from market volatility.

It kind of works as follows...

Last month, you put £100 in. The market was high at the time, so your £100 didn't buy you very much. But then bang, markets have dropped this month. You're last £100 is now only worth £50. But that's OK, because this months £100 will buy you twice as many shares as last month when the price was double what it is now. If the price recovers, then your first £100 is back to its original £100 value, and this month's is now worth £200.

[b] I welcome those that understand it better to correct me on that[/b]

So over time, you are buying at high points and low points, so on average, you're buying at the average price if that makes sense. 

Whereas buying in lumps infrequently, as I understand it, the risk is you buy at the peaks, ie the most expensive times to buy. And don't benefit from buying at the low points that will rise back up. 

The risk of lump sum investing is made by you here, but the reality - when measured in the past - is that lump sum investing beats DCA/DPA around 65% of the time.  

The basic effect driving this is that markets more often go up than they go down, so in reality DCA/DPA tends to average your price up over time, rather than necessarily reducing the risk of buying at the peak before a crash/price correction.

The choice to DCA/DPA is more a psychological one than a method to reduce risk - the Vanguard research states that “DCA just kicks your risk further down the road” (or words to that effect).

Nevertheless, investing is hugely psychological, so whichever option is more comfortable for the individual, is more likely the right one.

JustAnotherSaver

Uhh, just to check, is that an answer to the thread opener or my post last night?

Was going to ask in a new thread but thought I'd not long ago made this one and it's a similar question from a different angle so asked in this thread.

I get the impression you're saying going with 12x333.33 would be better than my thought of taking a straight 4k out of my savings and doing it in 1 hit on day 1.

Obviously forgetting for a second that 333.33 lands you 4p short & we're now on day 2. 

underground99

JustAnotherSaver said:

Uhh, just to check, is that an answer to the thread opener or my post last night?

Was going to ask in a new thread but thought I'd not long ago made this one and it's a similar question from a different angle so asked in this thread.

I get the impression you're saying going with 12x333.33 would be better than my thought of taking a straight 4k out of my savings and doing it in 1 hit on day 1.

Obviously forgetting for a second that 333.33 lands you 4p short & we're now on day 2. 

The 'magic' of pound cost averaging (where you can see that even if the price falls it's not the end of the world because you are now buying at discounted prices) is as norsefox says, a bit of psychology that helps people get comfortable with committing to a long term investment plan and holding their nerve if markets fall. So investment firms and platforms will tell you about it in their marketing.  But markets generally go up over time so statistically it is better to invest earlier so you are invested for longer. The fact that markets generally go up is the whole reason you are investing anyway.


If the fund is going to fall in value so that the average price for the fund over the whole year is lower than it was on day 1, it will have been a good idea to have invested on a 'drip-feed' basis a little each month to catch more of the low prices. If it is going to rise in value - or even more frustratingly, rise for a while but then fall back later in the year - it will have been the wrong move to buy a little bit each month, as you would have been better to buy in one lump at the beginning.  You don't know which of those you are going to get.

If you buy a little each month from your savings account, you are basically saying that for 2021/22 you want to have your money spend about half the time in the savings account and half in the investment markets. As a long term average, savings accounts interest rates will be worse than investment returns by several percent per year. So, playing the game for the long term, the 'start all in cash, gradually released' method will be a worse option than having the whole year invested. 

Obviously it would be frustrating to invest all on day one (or day two) and then see a big crash.  But if you look long long term, you are already going to be 'averaging' or drip feeding because even if you always put all the money into the fund in April, you'll be doing some at April 2021 prices, some at April 2022 prices, some at April 2023 prices, etc etc.  There will be a whole variety of high and low points in those Aprils between now and age 50.

JustAnotherSaver

And that's why I always like to sound my thoughts off to you guys.
Input [jumbled mess] + you lot = output [sense]. 

Thanks.