Elston CPD Exploring the benefits of pound cost averaging | Page 3

Abstract
Exploring the Benefits of Pound-Cost Averaging
By Shweta Agarwal, Ph.D.
When investing in shares or funds, one of the natural concerns of any investor is whether it
is the ‘right time’ to buy the investment and what measures can be taken to mitigate the risk
of buying an investment when the price is very high. Pound-cost averaging (known as
‘dollar-cost averaging’ in the US) can be defined as planned periodic purchases of equal
monetary value of an investment. This contrasts to making a purchase all-at-once at a
single point in time. The rationale for this approach is to mitigate the worry of buying the
stock at the “wrong price” in retrospect. Some savings strategies, such as Defined
Contribution pension schemes embed pound-cost averaging as payroll contributions are
periodically transferred into a pension scheme, typically on a monthly basis. Similarly,
investment providers offering access to mutual funds for non-advised clients also encourage
‘regular savings plans’ meaning pound-cost averaging is the norm for many retail investors.
This paper revisits the conventional arguments in favour of pound-cost averaging and offers
new insights on its benefits both from an outcome perspective as well as a behavioural
perspective. While most research on historical data shows that the opportunity cost of
staying out of the market typically outweigh the potential benefits of pound-cost averaging,
we find pound-cost averaging can in-fact be profitable when considering longer holding
periods. When considering shorter time horizons, the loss-buffering properties of pound-cost
averaging can deliver a better subjective investment experience and therefore, from a
behavioural perspective, is arguably a superior investment strategy. Furthermore, poundcost averaging can help overcome poor behavioural tendencies such as market timing and
attention effect which affect buying decisions and subsequently lead to suboptimal
investment outcomes.
Key words: Pound-cost averaging, behavioural finance, investment decisions, time horizon
JEL Codes: D03, G11, G18
SSRN 2615093

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