When pursuing long-term financial goals such as saving for retirement or for your child’s education a regular savings plan can provide many potential benefits to investors. However, interest rates being what they are at the moment do not allow for much growth in your savings. So, how can you improve your investment opportunities long-term in a volatile stock market?
To improve the chances of a better return on your investment many look to invest in growth assets. There will always be periods of volatility and extremes when it comes to certain investments. Investing a specific amount on a regular basis enables investors pursuing long-term goals to take advantage of the market’s ups and downs. They use an investing technique called Cost Price Averaging.
Cost Price Averaging
Cost Price Averaging is a method of investing a fixed amount of money at regular intervals over a period of time. This has the potential to reduce the average cost of shares being purchased and improve your long-term investment opportunities. It is regarded as one of the simplest investment strategies around. Many people begin their investment this way indirectly, in the stock market.
The number of shares that can be purchased for a fixed price will vary depending on their price at any one time. This can lead to more shares being purchased when their price is low and fewer when the price is high. It can be done over several months or years. The investment will increase and decrease in value over time because you’re purchasing shares when they are both high and low. This results in less risk to your investment than if you invested a lump sum and greater peace of mind.
For investors who employ the Euro-Cost Averaging approach, down markets can work to their benefit, as long as the markets eventually go up. During down periods in markets, investors are able to take advantage of these falling prices because they buy more units. By investing your money every month when the market falls you will get more units for your money. If the market rises, you will, of course, purchase fewer units, but your existing units will also be worth more. Purchasing investors will usually be better off in falling and volatile markets but tend to be worse off in rising markets.
How does it work?
The process is fully automated. Your monthly direct debit amount will be invested every month regardless of what the market is doing.
The advantages of Cost Price Averaging
- Reduces exposure to falling markets from investing a lump sum
- Automated – money goes in each month
- Avoids having to second guess market movements
- Averages the cost of buying an investment.
For the first-time investor, this method of investing can help to reduce risk during times of market volatility. It avoids the pitfalls of attempting to ‘time’ entry into investment markets by reducing one’s exposure to falling markets from investing in a lump sum.
It is important to talk to us about the suitability of a regular investment plan for you and whether it is appropriate to your overall financial goals. Call us on 091 778677 for an appointment.
The above piece does not constitute financial advice. For more information click here to schedule a call.