Euro Cost Averaging is a useful strategy which can be used to help you reduce risk when investing.
It is an investment strategy that simply means that you are buying into a particular investment at regular intervals over a period of time (for example when you are paying into a savings plan), as opposed to investing your funds in a once-off lump sum.
How does this concept work?
When you commit to investing a fixed amount into a savings plan, you are essentially buying units, the price of which will vary due to market fluctuations. If saving on a monthly basis, the amount of money you use to buy the units will remain the same, however the number of units you buy will vary! When unit prices are low you will be able to buy more units, and you will buy less units when prices are high. It is the same principle when you spend the same amount topping up the petrol in the car each week – you buy more litres of petrol for the same euro amount when the price of petrol is lower.
What is the benefit for me?
Studies have shown that we fear loss more than we appreciate gains – a behavioural bias referred to as loss aversion. So when it comes to investing during periods of volatility, protecting our capital takes priority over generating market beating returns. Often we sit on the side-line and do nothing.
If you are worried about risk, Euro Cost Averaging can help reduce risk and help protect you again market fluctuations. By buying a fixed euro amount each month, your focus is on accumulating assets on a regular basis, instead of trying to time the market.