Pound cost averaging

[bullboy8]

Does anyone know whether pound cost averaging works in the same way as diversification (where it is possible to get less risk for the same unit of return?). Yes, pound cost averaging gives lower risk but it also gives lower return whereas diversification may necessarily not. Put it another way-is the risk adjusted return the same when you invest one lump sum or in many small amounts. Thanks.

 

[Rhody Trader]

You can't really compare cost averaging with diversification the way it seems you are attempting. The latter is meant to remove elements of the risk of holding a single security. As such it creates a very different risk profile. Since cost averaging is singular, there is no way to change the risk per unit of return. All you can do is adjust the % of the portfolio invested. That doesn't change the risk profile of the position.

 

[bullboy8]

thus, in conclusion, pound cost averaging is not as good as it is sold to us. it simply adjust your risk profile (in which case you can achieve by investing in higher or lower volatile securities).

Thanks

 

[HairyMoose]

I'm trying to back test pound cost averaging on the FTSE100 now, but maybe not strictly pound cost averaging. My own version of it

 

[LOTONtech]

Diversification takes many forms. We might say that pound-cost-averaging is "diversification over time" rather than the more traditional "diversification across assets". Whereas many advocates of PCA suggest doing it on indices -- which to my mind are not diversified at all because you have to buy or sell the whole rather than the constituents -- when position-trading I prefer to diversify "across assets" (i.e. trade individual stocks) and "over time" (e.g. by pyramiding or occasionally averaging down on those stocks individually). Best of both worlds.