Is Pound-Cost Averaging Overrated? – Morningstar 10-30-12

Salient to Investors:

Pound-cost averaging incurs an opportunity-cost to be paid for holding money in cash while it waits to be invested in the market.

A recent US Vanguard study over rolling 10-year periods from 1926-2011 found that, on average, lump-sum investing resulted in higher returns than pound-cost averaging about two-thirds of the time for an all-equities, all-bond, or 60% equity/40% bond allocation portfolio. This held true for markets in the UK and Australia.  

Vanguard found that the longer the pound-cost averaging time frame, the greater the chance of the lump-sum method outperforming – pound-cost averaging over 36 months lost out to the lump-sum method 90% of the time for US markets.

The average rate of outperformance was relatively modest – for a 60/40 equity-bond allocation in US markets over a period of 12 months, the difference after 10 years was 2.3%.

Vanguard found pound-cost averaging often performs better in market declines – in 1,000 rolling 12-month periods in US markets, lump-sum investors saw a decline in value 22.4% of the time vs. 17.6% for pound-cost averaging.

Read the full article at http://www.morningstar.co.uk/uk/news/96177/Is-Pound-Cost-Averaging-Overrated.aspx