While there's pretty much no such thing as a risk-free investment, there are strategies you can employ to minimize your risk. One such tactic is known as euro cost averaging (or any other currency you will be using).
How does it work?
Euro cost averaging is simply the term used to describe the strategy of making regular incremental investments over a period of time as opposed to a one-off lump sum investment. This will be done at regular intervals regardless of the share price at the time of purchase.
While the amount of money you put in at each interval will be the same, the number of shares that money buys you will not. That's because market fluctuations dictate share prices, causing them to rise and fall.
With this approach, you end up buying more shares when prices are low and fewer shares when prices are high.
What are the benefits?
By following this simple strategy, you can protect yourself against market fluctuations and downside risk in the market. By buying a fixed euro amount on a regular schedule, your focus is on accumulating assets on a regular basis, instead of trying to time the market.
This strategy allows you to take a lot of the emotion and fear out of investing because where the market goes in the short-term is far less important to you, as long as you stick to a regular investment plan. If a recession hits the economy and your investment falls in value, you’d just end up buying more shares at a lower price.
How does euro averaging reduces our costs?
By way of example if you want to invest €6,000 this year, you can never know exactly when it is the best time to do so. By using this method, you will eliminate the need to ‘time’ the market as this prevents you from investing a lump sum at the worst possible moment and enables you to benefit from market falls.
As per below data, we can notice that the average cost per unit during the year was €1.06. By investing regularly smaller amounts however, your average cost is lower at €1.01!
There are various strategies available one can look at when deciding to invest. If you want to know our ideas when looking at long term investments, you can subscribe to our FREE webinar which will be held on Tuesday 13th November at 8pm. More information here.