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Pound-cost averaging: the buy low superpower

You know how Batman is a superhero without any superpowers? How he’s just a smart dude with loads of money?

Well he probably earned a chunk of that money through pound-cost averaging – the superpower for smart dudes.

Okay, work with me here…

You may not be feeling like much of a hero right now. The stock market has been smashed, and the global pandemic is unfolding like the first act of a horror movie.

There’s some whispered talk about this being a buying opportunity.

But it’s hard to buy when you’re frozen with fear.

An average winner

However there’s a simple technique that turns you into a buying badass without lifting a finger.

If you’re already investing then you’re probably doing it already. You just gotta keep doing it during the meltdown.

Yes, it’s pound-cost averaging and it will work just so long these aren’t the End Times*.

Picture the scene. The markets are convulsed with panic. Equities go down 20% in a flash. They keep sinking like a submarine with a hole in its hull. They hit bottom 50% down from the peak. That’s up there with the worst crashes in history.

Eventually though, dawn breaks. The world overreacted. Optimism returns. The market climbs. It keeps climbing.

Here’s the story told through the medium of pound-cost averaging:

You’re up 30% on your new money! £10,000 in cash contributions turns into £13,000.

Anything you had in before the crash is back to evens.

If you stopped investing dead at £10 per share then no profit for you. You’ll only break even when the market returns to £10 per share.

If you sold during the market swan-dive then you’re likely still under water.

But if you pound-cost average through the crisis then your portfolio breaks even sooner. Your new money registers a profit just as soon as share prices rise above your average buying price  – £7.69 a share in the example above.

Buying on sale

If you don’t believe the end of the world is nigh and your emergency fund is in order, then keep calm and carry on investing.

We don’t need to do anything clever here. We don’t need to guess when the market’s hit bottom. We simply admit that we don’t have an edge.

Just keep drip-feeding the cash in by monthly direct debit. Buy your usual investments. Wait for the market to recover. Do not sell.

A stock market chart that shows you can breakeven earlier with pound cost averaging

Recovery period

How long might it take for the market to get back to where it was?

  • Peak to trough to recovery takes a little over three years on average, according to a Vanguard review of global equity bear markets.
  • Hold up! More like five to seven years, according to a deeper analysis by Early Retirement Now that factors inflation into the equation.

Both studies assume you don’t move a financial muscle – that you’re paralysed like a poor church mouse in the face of the crisis cobra.

But recovery needn’t take quite so long if you pound-cost average through the crisis. It’s the auto-pilot program that makes you look like a daredevil.

Take it steady,

The Accumulator

* Pound-cost averaging doesn’t work if the market never recovers. If this is the end of capitalism as we know it then all bets are off. I don’t believe that it is. Do you?

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{ 72 comments… add one }
  • 51 miner 2049er March 19, 2020, 10:44 pm

    reminder to myself, emergency fund money isnt to be used to buy “cheap stock”

  • 52 MrOptimistic March 20, 2020, 8:33 am

    @Clementine, yes, a timely reminder.
    Had a sly glance at one account yesterday. Through my squinting eyes looks like equity global generalists are down about 40% and bond funds static, neither up or down much. Since I claim my objectives are capital preservation, I shouldn’t think of chancing my arm and committing fresh cash to anything much at the moment.
    When the smoke clears and dust settles, governments are going to have to draw the accounts. The future landscape may be much different from that of a month ago so even if I was minded to slowly reinvest, I don’t think that should be on the basis of continuation of the ‘old’ stories. Infrastructure spend, for example, may be pushed down the order of government priorities
    If you can’t see the road ahead, perhaps pull over and stop the engine for a while.

  • 53 Neverland March 20, 2020, 8:33 am

    @never give up

    I think you confusing ‘market timing’ with a need to rebalance now for passive investors

  • 54 Bob March 20, 2020, 9:52 am

    @Madflier. Yes I had a similar idea last year to be told by HBOS that bed & ISA was not possible with the very basic ETF because they were “sophisticated funds”.

  • 55 never give up March 20, 2020, 10:39 am

    @Neverland. Rebalancing is fine but some seem to either want to deploy emergency funds or significantly change their asset allocation. As I say no criticism from my perspective. People are free to invest however they want. I know little other than what I have read on sites such as Monevator.

    For those like me that have little knowledge or do find stock market investing a little daunting, then I do think it is important to stick to the plan.

    My Emergency Fund is there for a reason. So I’m not going to use it to invest. I’m also not going to radically change my asset allocation because of events. If I make wild changes right now I’m likely to make mistakes. So I’ll just plod along as I am and try to stick to the simplicity of the “Don’t just do something, stand there” approach.

  • 56 xxd09 March 20, 2020, 10:58 am

    Have an Investment Plan written down
    Set your Asset Allocation
    Have 2 years of living expenses in cash
    Have your age in Bonds as the bond proportion of you portfolio
    Equities and Bonds should be Global Index Funds
    That’s it for a start
    As you acquire more knowledge you can tinker but if you do nothing more you will arrive at your goal of a reasonable retirement
    xxd09

  • 57 GVS March 20, 2020, 11:09 am

    Advice sought!

    I have been fortunate and was positioned quite defensively into this sudden selloff.

    However – now I need to decide how to start putting come chips back on the table as I have a very long term perspective and I think that this should be a good entry point (although I obviously know that I won’t be able to time it perfectly).

    Given the crazy intra-day moves I think funds (e.g. LifeStrategy) are not a good vehicles currently so I am therefore sticking to (low cost/passive) ETFs.

    I don’t have much time in general so I just want to stick to simple World Equity GBP-hedged ETFs.

    The best I have found is IGWD…

    I was wondering if anyone has any other suggestions on the ETF front that I could be looking at closer?

    Thanks!

  • 58 Onedrew March 20, 2020, 1:03 pm

    IGWD’s divi-paying equivalent IWDG with .25% cheaper OCF (.3% plays .55%) appear to be the only really large and liquid global hedged funds. I use the distributing version for rebalancing tho in the current market I can see the benefits of the accumulating version. Wish Vanguard would offer currency hedged alternatives.

  • 59 xxd09 March 20, 2020, 2:22 pm

    I use Vanguard Global Bond Index Fund hedged to the Pound for the bond part of my Portfolio-actually 65%
    I use a Vanguard Global Index Equity fund ( actually I use 2 funds-one a UK one and one a World ex UK)-unhedged -30%
    Cash 5%
    Seems to work
    xxd09

  • 60 CollReg March 20, 2020, 4:48 pm

    Looking forward to the new tax year, will be opening a new LISA and splitting my contributions henceforth between that and the general S&S ISA. Pound cost averaging with a 25% headstart on half the pot? Yes please!

    (If nothing else, this plan is a distraction from checking up on the real terms losses living in the S&S ISA currently…)

  • 61 GVS March 20, 2020, 6:00 pm

    @AndrewSeib @xxdo9 – thanks!

  • 62 Jonathan March 20, 2020, 6:46 pm

    It is interesting that at times when the markets trend upwards, advice tends to point out the benefit of time in the market, that a lump sum invested early does better on average than dripfeeding it. But now the markets are in decline with no indication when or where the bottom is, the benefits of pound cost averaging get advised.

    Obviously, since overall stock markets have tended to go up long term even when they have suffered setbacks along the way, any modelling will favour lump sum investment. But similarly, that long term modelling will show that 100% equities will do better than a balanced portfolio. For real investors who don’t have 120 years to play with and get nervous about share volatility, the reduction in risk is well worth the modest loss in benefit that comes both from including bonds in a portfolio alongside shares and from phasing investments.

    (Though to be fair, most readers here will likely practise pound cost averaging not as a strategy but because availability of cash comes in small chunks as it is saved from earnings).

  • 63 BBlimp March 20, 2020, 8:15 pm

    Seems the Man is going to underwrite wages…

    On the plus side, with the govt taking the vast bulk of risks in the economy we can finally cut the cord with the EU phew

    No Deal, No Problem

  • 64 MrOptimistic March 20, 2020, 10:51 pm

    @GVS. Patience is a virtue! Wait a while yet.

  • 65 Don March 21, 2020, 8:03 am

    @ Grislybear.

    I know TI is going to tell me off but I’ll VERY gradually be increasing my Degiro margin loan over the next 12 months or until the market stops going down, whichever is earlier. I started today, essentially gearing my portfolio to < 3%. This is partly because my earnings are very irregular but I’ve got some chunky payments coming in over the next couple of months. And partly because I’m very risk tolerant (read: greedy).

  • 66 Jim brown March 21, 2020, 1:07 pm

    The bright side.

    Last month my pension contributions bought 62 units.

    This month the same contributions bought a whopping 105 units. That’s a massive discount. Obviously this will have to be balanced against the drop in the value of my portfolios.

  • 67 Don March 21, 2020, 6:23 pm

    @ GVS

    VWRL or anything similar. Check this website’s EXCELLENT archive, especially the cheap index trackers page.

    Plus this link re. your other concerns: https://monevator.com/lump-sum-investing-versus-drip-feeding/

  • 68 Don March 21, 2020, 6:26 pm

    Excellent comment

  • 69 Onedrew March 21, 2020, 7:47 pm

    I agree Vanguard’s global etf VWRL is usually a good choice. Problem is when the global market dives the dollar rises. VWRL has been protected from a greater fall by the collapse of the quid, but if sterling recovers to its pre-Brexit level there will be a huge reversal for this unhedged global ETF. As far as I can see IWDG is pretty well immune from this problem. If you prefer accumulators it’s VWRP v IWDG.

  • 70 jo jasper March 30, 2020, 2:35 am

    Just an observation and a question from someone who has not visited the UK for a long time. Your English seems totally American but you are a Brit? “dude” “work with me here” “badass” It that common now? Why would you do that when you have rich heritage of Britishisms — bloke, fella, etc? Are Brits now ashamed of their own language? Is it no longer cool? Would explain why, if you are British, Brexit and yet another “free enterprise” destroy-the-NHS Tory government

  • 71 Onedrew March 30, 2020, 9:25 am

    Sparked into reading by Jo Jasper’s observation, I notice that I gave the wrong code for the iShares MSCI World GBP-hedged accumulating ETF. It is IGWD, while the distributing version is IWDG. My apologies.

  • 72 The Accumulator March 30, 2020, 6:18 pm

    @ Jo – yes a Brit with a love of language regardless of origin. I don’t mind whether you think my writing is a load of old pants, chuddies or briefs.

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