- Cost averaging is the method of investing where a certain amount of money is invested in a specific interval over time.
- Mitigates Risk
- Very Smart way of investing in the long term
- It is asset accumulation
Investing long term without the anxiety
Not everyone can time the market as well as the top traders in Investagrams, and not everyone can handle the pressure red candle sticks bring during dumps. Even though there is no absolute risk free method of investing, there are methods smart investors use to minimize risk.
Cost averaging is perhaps the simplest and least stressful approach to investing, wherein the main objective is to accumulate as many shares as possible and stay above the average price to gain profit.
Cost averaging is a very long term and conservative investing strategy. Instead of investing a lump sum and risking everything all at once with a single pump or dump ready to make you rich or penniless, implementing cost averaging regularly takes portions of your lump sum and invests it in a preset schedule.
Being able to accumulate shares over time at different price points protects your portfolio from the painful losses of sharp dumps. Since Cost averaging is very conservative in nature, it doesn’t benefit as much as other methods from breakouts. It, however, does a very excellent job of preserving your wealth.
To put cost averaging into perspective, suppose that you want to invest 1M in Jollibee Foods Corp., which is currently 4 pesos per share. If you invest everything in a single price, and that price drops to 3 pesos per share in the following week, you would have already lost a quarter of your capital if you were to close the trade.
Now, if you were to invest your 1M evenly in a span of 8 months, you wouldn’t have to commit to a singular price that can dictate your capital the next day or so. Investing 125 000 per month, and purchasing as many shares as your monthly budget can afford mitigates your risk and prevents a single price to lift or crush your capital.
Yes, you would sometimes buy an overpriced share, sometimes an underpriced share, but as you accumulate shares over the months, time will do its part and grow your capital. No more FOMO, no more complicated Technical Analysis, no more stress.
It is important to note that like everything in investing, there is still risk involved in this approach, and that cost averaging isn’t the one size fits all answer for getting rich. Declining markets can still be a threat to your capital even if you follow this approach.
The cost averaging approach is not for everyone though. Investors who are really thinking long term will find this strategy stress free, easy, and effective. It eliminates confusion during entry and exit, and gives clarity to investing in the stock market by keeping things simple.
Traders with higher risk appetites however, may find this method a bit slow and boring for their liking as they are used to riding trends, anticipating pumps and dumps, and getting in and out fast. Even as such, cost averaging shouldn’t be completely overlooked by traders as this can still be a useful approach to preserving the wealth that they have accumulated over time.
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