Investment tools: Pound cost averaging approach.

"In the ... post (Strategy for the Euro?), you talk about pound cost averaging and brokers offer this service....to keep fees down, did you use the companies share administrator to acquire new holdings? I.e. for lloyds, you had a account with Equinity?"

OK, so I have mentioned pound cost averaging in a few posts now but probably not fully explained how this might be applied.

The trailblazer, in my opinion, was Halifax, which previously marketed an account called Sharebuilder whereby you could choose to set up automated regular monthly trades to purchase blocks of shares as small as £25 with a dealing charge of £1.50.
You were given a choice of the same 4 "dealing" days within any month should you have a particular preference.

Halifax did state a minimum £25, but, as far as I could tell (and experienced), there was no limit other than your funds, and the charge would still be £1.50.

For someone who has traded, there is a blind spot (as the date is set in advance), so you wouldn't know the exact price you are going to be trading at and once into the trading day have no easy option to cancel.
But you do need to remember that the strategy is to pound cost average so any swings and roundabouts should be smoothed out over time in your monthly evolving average holding price.

Although I no longer use Halifax I did find the service to be very flexible with:
- the choice of 4 trading dates,
- being able to set up/change/cancel the night before a trading day, and
- I never found a share I couldn't trade (aim etc).
I even used it for one-off purchases with more substantial amounts that were still dealt for £1.50 (+stamp duty).

I have also used other brokers (Selftrade being one) which have matched the dealing charge but only offered 1 dealing date in the month and restricted to FTSE 100 shares. TD Waterhouse is another who offer this service.

Its a strategy normally associated with Unit trusts but I found it to work well with high yielding shares (either rock solid or in recovery) as you get a reward for your patience with the dividends whilst also "saving" up to a reasonable stake.
Once you've reached a reasonable stake you can re-direct your savings towards another share.
Depending on your savings amount you may  choose to buy more than one company from the off. It might take longer to reach your stake targets but introduces diversification.
Diversification adds a further means of managing risk whilst also improving your probability of success by purchasing more than one share.

I also think that it serves as a useful half way house for those individuals who are:
- looking beyond savings accounts
- wanting to trade/own individual shares (as opposed to funds),
but:
- might not have substantial capital to start with
- need to manage exposure
- want to start a regular savings/investment habit

It does help to manage risk/exposure with smaller regular purchases and I try to view the little extra expense (average price v best price) as a sort of insurance premium.
Trying to time shares by finding the bottom (or top?), whilst theoretically rewarding, can also prove to be a stressful and ultimately fruitless exercise
A strategy such as this can also complement, or run alongside, an existing portfolio as it still drips feed regular amounts into the market that might otherwise be seen as too small to trade.
And, in uncertain or sideways trading markets such as these last couple of years have been it could be particularly useful as a means to manage risk v. horizon.
For example, despite what many of might say it is difficult to commit capital to falling markets as your personal risk alert and fears heighten.
However, committing smaller "automated" regular amounts that are relatively insubstantial and not immediately missed, allow you to sleep at night whilst still managing personal levels of risk and buying value in the market.
Buying on a peak increases your average purchase price but remains below current market price and buying on a dip lowers your average purchase price.

I believe that the brokers mentioned term their offerings as regular investment options as part of a Dealing Account (so they aren't a stand alone service) and that the Halifax charge is now £2 (http://www.halifax.co.uk/sharedealing/investment-options/ways-to-invest/regular-investments/).
It should also be said that the brokers mentioned still offer real-time trading within the same accounts for the "full" charge.
Remember though, that there may be a annual management charge for any trading account.

I would assume that these 3 brokers are not alone in offering this service so you should look to your own preferred broker/dealing service first should you wish to explore this strategy.

The service and strategy is equally applicable to executing within an ISA or SIPP (account charges apply), and most brokers these days seem to offer fund supermarket options allowing you to undertake a similar strategy with funds alongside individual shares should you wish to do so.
Remember also that with a 2012-13 annual ISA allowance of up to £11,280 (http://www.moorestephens.co.uk: Increased ISA allowances for 2012/2013 ), you could put a regular savings habit towards this allowance.

Its not where I started from as a strategy, but on a last thought, in this day and age it is all too easy to dismiss small amounts and regular savings but they can all prove useful in helping to start a savings habit and taking "cumulative" steps towards your financial goals.


Article links:
- http://www.halifax.co.uk/sharedealing/investment-options/ways-to-invest/regular-investments/
- http://www.selftrade.co.uk/services/price-list/dealing-charges.php
- http://www.tddirectinvesting.co.uk/choose-an-account/regular-investing/
- http://www.moorestephens.co.uk: Increased ISA allowances for 2012/2013

Earlier posts:
- Strategy for the Euro?
- My end of year tax planning.