Pound-Cost Averaging

[Serendipity]

Any stacker/collector like myself who purchases gold and silver coins at regular intervals rather than all at once with a lump sum is involved in pound-cost averaging. Pound-cost averaging is a technique that reduces exposure to falling markets from investing a lump sum. By investing at regular intervals more coins are purchased when precious metal prices are low and fewer coins are purchased when prices are high. The investor will be better off in falling markets.

https://www.vanguardinvestor.co.uk/articles/latest-thoughts/how-it-works/what-is-pound-cost-averaging

 

[5huggy]

ALSO is more meaningful when spread over a LONG period of time too @Serendipity as it spreads into a nice long waveform of pricing!

Top one is the preferred over time! 😉 👍

[Serendipity]

10 minutes ago, 5huggy said:

ALSO is more meaningful when spread over a LONG period of time too @Serendipity as it spreads into a nice long waveform of pricing!

Top one is the preferred over time! 😉 👍

That’s a really good graphical way of showing pound-cost averaging! I like to think of it in terms of the famous hare and tortoise paradox. The hare can never overtake the slow-moving tortoise no matter how fast the hare runs. In other words, if someone chose to compete with me by buying up all the same gold and silver coins I’ve bought over the years in one lump sum then he’ll still need to apply for a loan or overdraft for more funds because all my coins have appreciated in value.

[Tattoedamat]

Nicely put

[vand]

I'm going to rock the boat a little here and bust some myths about cost averaging.

Cost averaging sounds good on paper, but the argument is mostly flawed.

In general you shouldn't cost-average into a position. However, this is contingent on you first getting your Asset Allocation right. People who advocate cost-averaging do so because they have not first understood the importance of asset allocation and are too aggressively positioned.

This is particularly true when talking about a volatile asset like silver. 

If you have, say £100k to invest, would you put it all into silver tomorrow? Probably not, because we all know that a 100% silver portfolio is incredibly volatile. So what do you do? cost-average it in over a period of time? No you decide on an asset allocation plan that you would be comfortable to have an additional £100k invested in this time tomorrow.

Please read: https://ofdollarsanddata.com/the-cost-of-waiting/

OK, so hopefully that article should convince you that investing any amount of cash straight away rather than averaging it in over time is the way to go.

In practice, not many time in our lives do we suddenly run into a £100k windfall that we can invest as we please. So we invest what we can from our monthly income.  Contributing £1k/month from your monthly paycheque into your chosen portfolio will, in practice, have the same effect as const-averaging in £12k over a 12 month period. 

But they are not the same thing. Why? Because in the cost-averaging scenario it is assumed that you have the cash upfront. In the monthly accumulation scenario it is assumed that you are contributing from new funds that you receive monthly.  People may thing that it's just symantics; what is the difference? But there is the world of difference. In contributing from you monthly paycheque you are effectively contributing 100% of the funds you have available at that time.  Cost-averaging implies that you are contributing only a fraction of the funds you have available to you at the time.

You may say that an you can bring the two positions together by borrowing forward the total amount you plan to to invest and front load it all, but that is not the argument I am making. Introducing leverage into the equation completely changes the way you feel about your portfolio. And what how you feel and how easily you sleep is at least as important as anything else when it comes to investing.

 

In short: ignore cost-averaging. It's for people who don't understand asset allocation. Instead, aim for steady accumulation, and invest fully the funds you have available to you at the time, but do not borrow to invest. 

[HGr]

So if somebody did have savings they wanted to invest, should they bang it all in today or drip feed it in over a year? 

[Martlet]

36 minutes ago, HGr said:

So if somebody did have savings they wanted to invest, should they bang it all in today or drip feed it in over a year? 

The analysis suggests that if you put a lump sum in it will be better long term than slow accumulation. Cost averaging is better for those who dont have the lump sum, rather than saving to have a lump sum.  In other words invest today, or regularly, not second guess the market.  I cant say i practice this, as i get caught up trying to beat the market, then end up missing out on. 

[vand]

On 29/02/2020 at 07:44, HGr said:

So if somebody did have savings they wanted to invest, should they bang it all in today or drip feed it in over a year? 

*bangs head against the wall*

Do what you want.. it’s your money.