Does Pound-Cost Averaging Out of a Position Make Sense?

The method used to purchase stock might not be your best bet when selling

Adam Zoll 14 January, 2013 | 6:00AM

Question: 

I own a large holding of my employer's company stock and would like to sell out of it and diversify. Would I be better off pound-cost averaging out of the position or selling it all in a lump sum?

Answer: 

Many financial pros recommend pound-cost averaging when buying into a position, but it can be counterproductive when selling, as we'll see in a moment. First, let's review how pound-cost averaging, or PCA, works. In conventional PCA, shares are purchased at regular intervals and in fixed pound amounts over a period of time. One of the benefits of PCA is that it causes the investor to buy more shares when prices are low and fewer when they are high. PCA also reduces the volatility experienced by the investor and helps the investor avoid the temptation of trying to time the market by finding the right moment to invest a large sum all at once.

As discussed in this recent Short Answer column, a Vanguard study found that over long time periods PCA usually produces slightly lower returns than investing money immediately in a lump sum due to the fact that the market's long-term trajectory generally is up. Therefore, holding some money out of the market through PCA gives it less time to grow compared with investing the entire sum all at once. (Although lump-sum purchasing generally outperforms PCA, that might not be true in every case.) 

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The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
Coca-Cola Co45.03 USD-0.31

About Author

Adam Zoll  is an assistant site editor with Morningstar.com, the sister site of Morningstar.co.uk.

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