Q&A

Answer a question


Do you want to follow this topic? You need to be signed in for this feature
Do you want to save this article to read later? You need to be signed in for this feature


pound/cost averaging?

any views on this type of investing into a low/cost tracker isa monthly returns longterm will beat cash isa? how would you compare this to other types of investing thx

5
Answers


Do you want to answer this question? You need to be signed in for this feature

Answers




Pound cost averaging means investing the same amount of money each time and getting a different number of shares/units each time. Over a period, the average cost per share/unit would be lower than the average cost on each occasion. First of all, it doesn't work for share purchases unless you are investing at least £1,000 each time. Then it depends on whether the market is rising, falling or undulating. It is never really flat! If the market is rising, it is better to jump straight in at the beginning because the average price would otherwise be higher. If the market is falling, you are better waiting until it flattens out, when the price will be lower. It is ideal for an undulating situation, unless there are fixed dealing costs. A monthly subscription to a Unit Trust, Tracker or ETF is the usual example of pound/cost averaging, whether in an ISA, or not. Unless there is no extra charge for the ISA or you will be paying a higher rate of tax, or you might have to sell a large quantity in any one year, many years down the line, it is probably not worth while having equities in an ISA. Mike Mike



A good article here: http://www.fool.co.uk/news/investing/investing-strategy/2009/06/15/mind-games-pound-cost-averaging.aspx?source=isesitlnk0000001&mrr=1.00 I'm not sure what Mike means by "it doesn't work for share purchases unless you are investing at least £1,000 each time" but if he means you should invest at least £1000 pcm I disagree. There's no reason why you can't invest a much smaller figure (£200 pcm say) in an index tracker or fund say (that is still "PGA"). If you are buying "raw" shares you do need to work out how much you're paying in commission as a percentage, so a higher figure may be a sensible "minimum" to avoid wasting costs (perhaps this is what Mike meant) . It sounds a clever technical term but it just means setting up a monthly s/o for investments. You will see from the article there is research to say you won't beat "lump sum investing" however the advantage of PGA in my view is more psychological (invest + forget) less nailbiting over the market prices wondering if you should invest now or next week. Personally I do both (they are not mutually exclusive of course)



I meant PCA, not PGA!



thx



Yes, I was referring to the commission/dealing costs involved with "raw" shares. Mike