Regular Savings Plan
Cost averaging is a technique designed and engineered to reduce market risk for the investor through the systematic purchase of investment units at predetermined intervals and set amounts.
Many successful investors already practice this method without realising it. Many others could save themselves a lot of time, effort and money by beginning a regular savings plan and taking advantage of this method. On this page, you will learn the three steps to beginning a regular savings plan of your own, look at concrete examples of how it can lower an investor’s cost basis, and discover how it reduces risk.
Cost Averaging. What is it?
Instead of investing your money as a lump sum, the investor works his/her way into a position by slowly buying smaller amounts over a longer period of time. This spreads the cost basis out over several years, providing insulation against changes in market price.
Setting Up Your Own Savings Plan
In order to begin your own regular savings plan, you must do three things:
- Decide exactly how much money you can invest each month. Make certain that you are financially capable of keeping the amount consistent; otherwise the plan will not be as effective.
- Select an investment portfolio that has a proven performance track record and that you want to hold for the long term, this I will build for you. (Index funds are particularly appropriate)
- At regular intervals (monthly works best), invest your decided amount of money into your portfolio you have chosen. Most providers can set up a monthly automatic withdrawal via VISA or MasterCard so the process becomes automated and easy for you.
Dollar Cost Averaging Example Chart (works with any currency $€£ etc.)
Here is a simple example of dollar cost averaging. The example is for a fictitious managed fund we will call it Managed Fund ABC. The minimum investment for Managed Fund ABC is $6,000. Many people don't have $6,000 to pay upfront but this fund allows investors to enter via a savings plan.
The below chart is the result of dollar cost averaging over a 12 months period of investing $500 per month. What you can see is that when prices are high fewer units are purchased and when prices are low more are purchased. The average unit price comes to $35.795, which is lower than the price during January, $36.855. The total units bought are 167.47 units, which is more than the 162.8 units had you bought at January’s prices with a lump sum of $6,000.
In this example we see the benefits of dollar cost averaging as you end up paying less money for more units over a longer term.
Currency Cost Averaging
"Calculate Your Own Savings Plan"
