Here is a scheme for beating the market that really works. Imagine a volatile share that sells for 50p in odd years and 100p in even years. If you invest £100 every year in this share, over a 10-year period you will have accumulated 1,500 shares at an average price of 66.7p, well below the average market price, which is 75p.
This system will, on average, outperform the market [...]. The method is known as pound cost averaging.
One of us is crazy.
In the past I have poked fun at the free financial advice I received from my bank. That advice was exactly this: invest the same amount each month.
Now that doesn't sound very impressive advice. It sounds like just the sort of advice you would get for free. So usually this advice goes by the more grandiose name of "pound cost averaging." In the past, I have claimed that pound cost averaging will not beat the market, despite Kay's plausibility argument above. On the other hand, I don't think it will do worse than the market, either. And, when you think about it, "save a little bit each month" is actually quite good advice, if what you want to do is save.
But a scheme for beating the market? Doesn't that sound unlikely? So here's my challenge. Using Kay's example:
- How can you quantify the performance of the strategy?
- What is the performance of this strategy?
- What is the performance of the market?
- Did pound cost averaging beat the market?
Disclaimer: I am not a financial advisor, obviously.
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