Rises and falls are part of normal stock market life. It can be easy to become preoccupied with the volatility and unpredictability of the financial markets and make hasty and rash decisions based on fear and emotion. Some people try to predict how the markets will react and switch their investments or try to buy at the bottom of the market, but the reality is that very few achieve the correct timing.
Regular savings using a unit cost averaging strategy is ideal for regular long-term savings.
Unit cost averaging is a strategy to reduce the impact of volatility by spreading out investment purchases over time. It refers to saving a fixed amount on a regular basis. It is an effective way to save and helps to ‘smooth out’ fluctuations in the value of your unit-linked savings plan.
Over time, this results in purchasing more units when prices are low and fewer when prices are high, thereby averaging out the cost per unit.
Saving a fixed amount on a regular basis over the long term, is an effective way to save and helps to ‘smooth out’ fluctuations in the market, and you get access to top fund managers for relatively small premiums. We call this method Unit Cost Averaging.
Market fluctuations affect the cost of the units in funds. A unit is basically a share in a fund. With every regular contribution you make, you purchase units of the fund to the value of your contribution. When the fund price is low, it means you can purchase more units. Higher prices mean you purchase less units for your money. Over time, the more units you purchase, the more profit you will make when markets are favourable.
By investing regular amounts into a long-term savings plan and making use of Unit Cost Averaging and the smoothing effect, your investments should grow at a better rate than trying to time the market with a once-off lump sum.
It’s all about time in the market and not timing the market.
This example shows how ‘Unit Cost Averaging’ (UCA) works. John uses the UCA approach while Simon invests a lump sum at the start of the year.
John invests £500 a month for one year into the fund. At the end of the year, John has acquired 7,530 units. Currently, using the December unit price, the units have a value £9,789 (7,530 x £1.30)
Simon, on the other hand, invests a lump sum of £6,000 in January. His investment acquires 6,000 units in the same fund. By the end of the year, using the December price, the units have a value of £6,500 (5,000 x £1.30).
As you can see, by spreading his investments over the year, John is £3,289 better off than Simon. For the same investment, he has benefited from the effects of UCA.
Regular savings using the unit cost averaging strategy is ideal for long-term savings like retirement, as it balances out market volatility and timing the market.
Please note, the above is for educational purposes only and does not constitute advice. You should always contact your adviser for a personal consultation.
* No liability can be accepted for any actions taken or refrained from being taken, as a result of reading the above.
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