This is an excellent question and one that has no definitive answer, since it depends entirely on what happens to the price of the assets you are buying over the time during which you are buying them.
What do you expect to happen, over the next year, to the price of the assets that you propose to buy?
If the price constantly rises then pound cost averaging will have worked against you. You would have been better using all your money to buy the assets at the first possible date.
Conversely, if the price constantly falls then pound cost averaging will have worked in your favour. However, you would have been better to wait until the last possible date to buy the assets.
If the price fluctuates then it will depend on how it fluctuates.
The problem is that there is no tried and tested, proven, system of predicting what will happen to asset prices over a given short term period of time.
So, since investors do not know in advance what will happen to the asset price on a short term basis, pound cost averaging effectively allows investors to mitigate the risk of trying to time the market, and getting it wrong, by investing on a regular basis.
Pound cost averaging also helps to impose the discipline of investing on a regular basis and thereby helps to remove the regret of not being in the market when it rises or putting all ones money into the market just before it falls.
In short, pound cost averaging may not make you better off than you would have been if you had put all your money into the market at one point in time, but it will help to smooth out the ride.
Emotions matter when investing and one of the key underlying, and often un-stated, points about pound cost averaging is that using it tends to keep you in the market even if there is a large market correction or crash. This is because you know you are buying more units at the new lower price and this brings the average price at which you have bought units down, so there is no point in selling the units you already hold. Thus, pound cost averaging tends to stop investors trying to time the market.
It is important to remember that costs matter. If the cost of dealing, brokerage, and other charges and commissions is greater for you if you use pound cost averaging then this could have a significant impact. You will need to calculate the cost difference, if any, between investing as a lump sum and investing using pound cost averaging.
Lastly, some investments have minimum investment amounts that are too high to allow you to use pound cost averaging, so this may be an issue you need to consider too. | 12.30.10 @ 13:46