Pound Cost Averaging in practice

Here we use a real-life example of how regular investment allows investors to use the ups and downs of stock market prices to their advantage.  By setting up a direct debit to invest a fixed amount each month, investors who can take a long term view can sit back and relax, knowing that if share prices fall, their regular investment is buying more shares than it does compared to when share prices are high.  In this respect, one could argue that you want share prices to fall (or at least remain low) in the short-term – it is only when you come nearer to selling that you want the share price to be high!

The following example uses Maverick’s monthly investment of £100 into Murray Income investment trust between August 2005 and December 2011. This was a particularly interesting period to be investing as it straddled the global financial crisis of 2008!

Murray Income Trust is a well regarded fund within the UK Equity Income sector.  Its investment objective is “to achieve a high and growing income combined with capital growth through investment in a portfolio of UK equities”.

Full details of the purchases are shown in the table at the bottom of the page, including the re-investment of dividends.

The chart below shows how the share price (red line) rises, falls and then rises again to end the period a little higher than it started.  For simplicity, we have only plotted the share price for the days on which the monthly deposit was used to buy shares.

Notice how the number of shares bought (green line) varies with the share price.  When the share price was at near its high around 730p in spring 2007, the number of shares being bought each month was 13 or 14.  When the share price drifted lower, the number of shares being purchased each month rose to 23 or 24 (peaking at 26 in March 2009 when the share price was 383p).  As the share price subsequently rose, the number of shares purchased each month fell again.

The second chart shows the cumulative amount invested (blue line) and the value of shares held (green line), which include those bought using dividends.

The difference between the two lines in the chart above gives the net profit, plotted below:

This illustrates the importance of taking a medium to long term view when investing (ie a minimum of 5 years) as it enables you to ride out periods when your investment may be showing a loss.  Note that purchases made during such periods yield the greater profits when prices recover.

Finally, here are some other points of interest:

  •  The average share price on the days when the monthly investment was made was 597p.  However, because more shares were bought on days when the share price was lower, the actual average price paid per share over the period was 584p.
  •  A total of 203 additional shares were bought through the re-investment of dividends.
  •  The total amount invested over the period was £7,700 and the value of shares held at the end of the period was £9,327.  At first glance, the £1,627 profit on £7,700 looks like a 21.1% return over the 76 month period.  However, only the first monthly amount of £100 made in August 2005 was invested for the full 76 months – the last £100 invested in December 2011 had no time at all to grow!  On average, the monthly amounts were only invested for half of the overall period, ie 38 months, and we should be ignoring the last £100.  In other words, a 21.4% return was made on an average period of investment of 38 months, which represents an annual return of about 6.3%.

Full details of the purchases are shown in the table below.

Pound Cost Averaging
Date Money In Shares bought Price (p) Total Cost* Total Holding Total Money In Stock value Net Profit
18/08/2005    100.00 17     557.50        95.25 17           100.00           94.78 –           5.22
22/09/2005    100.00 18     573.00     103.66 35           200.00        200.55              0.55
24/10/2005    100.00 18     550.50        99.59 53           300.00        291.77 –           8.24
22/11/2005    100.00 17     604.00     103.19 70           400.00        422.80           22.80
22/12/2005    100.00 16     609.50        98.01 86           500.00        524.17           24.17
23/01/2006    100.00 17     618.80     105.72 103           600.00        637.36           37.36
22/02/2006    100.00 15     652.00        98.29 118           700.00        769.36           69.36
22/03/2006    100.00 15     667.50     100.63 133           800.00        887.78           87.78
25/04/2006    100.00 16     660.00     106.13 149           900.00        983.40           83.40
22/05/2006    100.00 16     603.00        96.96 165        1,000.00        994.95 –           5.05
22/06/2006    100.00 16     627.50     100.90 181        1,100.00     1,135.78           35.78
14/07/2006 1     640.00          6.43 ** 182        1,100.00     1,164.80           64.80
24/07/2006    100.00 16     635.00     102.11 198        1,200.00     1,257.30           57.30
22/08/2006    100.00 15     649.39        97.90 213        1,300.00     1,383.20           83.20
22/09/2006    100.00 15     660.00        99.50 228        1,400.00     1,504.80         104.80
23/10/2006    100.00 15     691.50     104.24 243        1,500.00     1,680.35         180.35
31/10/2006 2     693.00        13.93 ** 245        1,500.00     1,697.85         197.85
22/11/2006    100.00 14     724.11     101.88 259        1,600.00     1,875.44         275.44
22/12/2006    100.00 14     707.24        99.51 273        1,700.00     1,930.77         230.77
19/01/2007 2     714.50        14.36 ** 275        1,700.00     1,964.88         264.88
22/01/2007    100.00 14     719.00     101.16 289        1,800.00     2,077.91         277.91
22/02/2007    100.00 13     734.50        95.96 302        1,900.00     2,218.19         318.19
22/03/2007    100.00 14     723.50     101.80 316        2,000.00     2,286.26         286.26
16/04/2007 2     726.00        14.59 ** 318        2,000.00     2,308.68         308.68
23/04/2007    100.00 14     724.00     101.87 332        2,100.00     2,403.68         303.68
22/05/2007    100.00 13     740.00        96.68 345        2,200.00     2,553.00         353.00
22/06/2007    100.00 14     723.30     101.77 359        2,300.00     2,596.65         296.65
13/07/2007 3     713.00        21.50 ** 362        2,300.00     2,581.06         281.06
23/07/2007    100.00 13     716.34        93.59 375        2,400.00     2,686.28         286.28
22/08/2007    100.00 15     704.80     106.25 390        2,500.00     2,748.72         248.72
24/09/2007    100.00 13     729.50        95.31 403        2,600.00     2,939.89         339.89
22/10/2007    100.00 14     704.50        99.12 417        2,700.00     2,937.77         237.77
01/11/2007 6     729.79        44.01 ** 423        2,700.00     3,087.01         387.01
22/11/2007    100.00 15     657.00        99.04 438        2,800.00     2,877.66           77.66
24/12/2007    100.00 15     651.00        98.14 453        2,900.00     2,949.03           49.03
18/01/2008 4     629.00        25.29 ** 457        2,900.00     2,874.53 –         25.47
22/01/2008    100.00 16     594.50        95.60 473        3,000.00     2,811.99 –      188.02
22/02/2008    100.00 16     632.50     101.71 489        3,100.00     3,092.93 –           7.07
26/03/2008    100.00 17     599.00     102.34 506        3,200.00     3,030.94 –      169.06
18/04/2008 4     636.00        25.57 ** 510        3,200.00     3,243.60           43.60
22/04/2008    100.00 15     637.25        96.07 525        3,300.00     3,345.56           45.56
22/05/2008    100.00 17     620.00     105.93 542        3,400.00     3,360.40 –         39.60
23/06/2008    100.00 18     551.50        99.77 560        3,500.00     3,088.40 –      411.60
18/07/2008 5     520.00        26.13 ** 565        3,500.00     2,938.00 –      562.00
22/07/2008    100.00 18     543.00        98.23 583        3,600.00     3,165.69 –      434.31
22/08/2008    100.00 19     546.00     104.26 602        3,700.00     3,286.92 –      413.08
22/09/2008    100.00 17     572.00        97.73 619        3,800.00     3,540.68 –      259.32
22/10/2008    100.00 23     428.50        99.05 642        3,900.00     2,750.97 –   1,149.03
06/11/2008 15     470.00        70.85 ** 657        3,900.00     3,087.90 –      812.10
24/11/2008    100.00 24     424.00     102.27 681        4,000.00     2,887.44 –   1,112.56
22/12/2008    100.00 22     453.75     100.32 703        4,100.00     3,189.86 –      910.14
16/01/2009 2     440.00          8.84 ** 705        4,100.00     3,102.00 –      998.00
19/01/2009 6     455.81        27.49 ** 711        4,100.00     3,240.81 –      859.19
22/01/2009    100.00 23     434.00     100.32 734        4,200.00     3,185.56 –   1,014.44
23/02/2009    100.00 24     418.75     101.00 758        4,300.00     3,174.13 –   1,125.88
23/03/2009    100.00 26     383.00     100.08 784        4,400.00     3,002.72 –   1,397.28
17/04/2009 9     436.00        39.44 ** 793        4,400.00     3,457.48 –      942.52
22/04/2009    100.00 23     429.00        99.16 816        4,500.00     3,500.64 –      999.36
22/05/2009    100.00 21     472.00        99.62 837        4,600.00     3,950.64 –      649.36
22/06/2009    100.00 23     441.75     102.11 860        4,700.00     3,799.05 –      900.95
17/07/2009 10     469.00        47.13 ** 870        4,700.00     4,080.30 –      619.70
22/07/2009    100.00 21     470.00        99.19 891        4,800.00     4,187.70 –      612.30
24/08/2009    100.00 19     520.00        99.29 910        4,900.00     4,732.00 –      168.00
22/09/2009    100.00 18     551.50        99.77 928        5,000.00     5,117.92         117.92
22/10/2009    100.00 19     533.50     101.87 947        5,100.00     5,052.25 –         47.76
28/10/2009 20     520.00     104.52 ** 967        5,100.00     5,028.40 –         71.60
23/11/2009    100.00 18     541.00        97.87 985        5,200.00     5,328.85         128.85
22/12/2009    100.00 19     513.00        97.96 1004        5,300.00     5,150.52 –      149.48
15/01/2010 10     539.00        54.17 ** 1014        5,300.00     5,465.46         165.46
22/01/2010    100.00 19     526.50     100.54 1033        5,400.00     5,438.75           38.74
22/02/2010    100.00 19     542.50     103.59 1052        5,500.00     5,707.10         207.10
22/03/2010    100.00 18     553.00     100.04 1070        5,600.00     5,917.10         317.10
01/04/2010 10     567.00        56.98 ** 1080        5,600.00     6,123.60         523.60
22/04/2010    100.00 17     569.50        97.30 1097        5,700.00     6,247.42         547.42
24/05/2010    100.00 19     528.00     100.82 1116        5,800.00     5,892.48           92.48
22/06/2010    100.00 18     550.00        99.50 1134        5,900.00     6,237.00         337.00
16/07/2010 11     565.00        62.46 ** 1145        5,900.00     6,469.25         569.25
22/07/2010    100.00 18     564.00     102.03 1163        6,000.00     6,559.32         559.32
23/08/2010    100.00 17     571.00        97.56 1180        6,100.00     6,737.80         637.80
22/09/2010    100.00 17     599.50     102.42 1197        6,200.00     7,176.02         976.02
22/10/2010    100.00 16     608.50        97.85 1213        6,300.00     7,381.11     1,081.11
27/10/2010 22     605.00     133.77 ** 1235        6,300.00     7,471.75     1,171.75
22/11/2010    100.00 16     620.00        99.70 1251        6,400.00     7,756.20     1,356.20
22/12/2010    100.00 16     645.00     103.72 1267        6,500.00     8,172.15     1,672.15
14/01/2011 10     649.00        65.22 ** 1277        6,500.00     8,287.73     1,787.73
24/01/2011    100.00 16     636.00     102.27 1293        6,600.00     8,223.48     1,623.48
22/02/2011    100.00 16     636.00     102.27 1309        6,700.00     8,325.24     1,625.24
22/03/2011    100.00 16     611.00        98.25 1325        6,800.00     8,095.75     1,295.75
15/04/2011 11     648.00        71.64 ** 1336        6,800.00     8,657.28     1,857.28
26/04/2011    100.00 15     643.00        96.93 1351        6,900.00     8,686.93     1,786.93
23/05/2011    100.00 16     655.50     105.40 1367        7,000.00     8,960.69     1,960.69
22/06/2011    100.00 15     647.50        97.61 1382        7,100.00     8,948.45     1,848.45
15/07/2011 11     649.00        71.75 ** 1393        7,100.00     9,040.57     1,940.57
22/07/2011    100.00 16     659.00     105.97 1409        7,200.00     9,285.31     2,085.31
22/08/2011    100.00 16     598.50        96.24 1425        7,300.00     8,528.63     1,228.63
22/09/2011    100.00 18     571.00     103.29 1443        7,400.00     8,239.53         839.53
17/10/2011    100.00 16     618.00        99.37 1459        7,500.00     9,016.62     1,516.62
27/10/2011 27     645.00     175.02 ** 1486        7,500.00     9,584.70     2,084.70
22/11/2011    100.00 16     594.99        95.68 1502        7,600.00     8,936.75     1,336.75
22/12/2011    100.00 17     614.00     104.90 1519        7,700.00     9,326.66 1,626.66

* includes stamp duty
** Dividend re-invested

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