Financial planning expert Keith Popplewell has shown how regular investments on falling unit prices can beat pound cost averaging.
He has shown how investors can reinvest cash into a vehicle with a falling unit price that will reduce the price level that the unit needs to rise for the investor to make a profit.
Popplewell believes the principle which highlights how pound cost averaging, which dictates that, over time, highly volatile movements in unit prices benefit an investor, only applies for one year.
He asserts that by averaging down, where the average cost of the unit holding can be lowered by regular further investments, the investor can make greater gains. For example, an investor buys 1,000 units at £1 a unit. The unit price falls to 40p. If, at each 10p fall the investor buys £1,000 of units, the unit price only needs to rise to 64p for the investor to make a profit.
Popplewell says: “The theory then suggests that, this average price having fallen, the unit trust does not need to recover its original level for the investor to make a profit. It is worth stressing that few advisers would be inclined to use such a strategy but I am aware of advisers who regularly recommend clients make further investments into a falling fund on the basis of what goes down must come back up.”