Unit cost averaging allows investors to take advantage
of ups and downs in the market by investing a fixed
amount at regular intervals of time.
Investing the same amount each period will buy more
shares of an asset when the price is low and fewer
when the price is high. As a result, the average purchase
price is lower than the average market price over
the same period. This lowers the risk of purchasing
assets at their peak.
A major benefit of unit cost averaging is that it
brings a discipline to investing that most investors
find difficult to achieve. It forces investors to
make systematic, timely investments in differing market
environments and prevents emotions from dictating
investment decisions.
The graph above shows exactly how unit cost averaging
works:
Note: Unit Cost Averaging does not assure a profit nor protect
against a loss in declining markets. Unit Cost Averaging
involves continuous investment regardless of fluctuating
prices, investors should consider their financial
ability to continue purchases through periods of low
price levels.
