What is pound cost averaging?

28 July 2009

"For several years I have read in Moneywise (and other sections of the press) of the benefits of saving regularly into investment trust savings schemes. ‘Pound cost averaging’, whereby more shares are bought when the price is low, is quoted as one of the main benefits. So now, with shares trading at their current level, would seem to be a good opportunity to profit from using this method.

I invest monthly (and reinvest the dividends) in three investment trusts – Glasgow Income, Shires Income and Shires Smaller Companies.

So I was surprised to receive a 
letter from Aberdeen Investment Trusts (which administers these trusts) suggesting that, in view of the current downward trend, I 
“review my direct debit and/or 
dividend reinvestment instructions”.

Surely this is contrary to the idea of pound cost averaging? Shouldn’t savers be taking advantage of the low share prices to buy more?"

Ask the Professionals: Philip Pearson, a partner at P&P Invest in Southampton and an investment portfolio specialist, says: 

You’re correct in your assumption about the benefits of pound cost 
averaging – you average out the peaks and troughs of the share price throughout the year.

This strategy enables you to benefit by buying a greater number of shares when the share price falls, resulting in higher overall investment returns when a recovery takes place.

Aberdeen is probably referring 
to the high level of volatility 
experienced within the share price of each trust.

You could interpret Aberdeen’s suggestion to review your direct debit as an invitation to increase your regular monthly saving if you wish to take advantage of the significant discount that currently exists in the share price of each trust.

In my opinion, if you are prepared to invest for the medium to long term, then significant value currently exists, which should boost overall investment returns when share prices recover in due course.


Add new comment