Market timing is one of the biggest dilemmas faced by investors. Jumping in and out of markets on a regular basis not only requires constant monitoring of daily events but also requires the skill to act on such events. Even the best fund managers avoid trying to catch the top or bottom of a market. The fact is, it’s impossible to time markets perfectly, so it’s best not to try.
Most of us want to invest and achieve the best returns for our future but we don’t want to put our hard earned capital at risk, just at the wrong time. Ideally we would like to improve our chances of entering the market at the right time. One way of doing this is to spread or drip-feed your lump sum into the market as opposed to investing it all at once.
During volatile times, this strategy allows you to benefit from what is known as ‘euro cost averaging’. The concept of averaging involves investing on a regular basis, usually monthly. This arrangement has a number of benefits to the average investor. It helps instil a sense of discipline to their investment habits; it avoids them having to second guess market movements and it averages the cost of buying an investment.
Markets are volatile, continuously rising and falling and very difficult to predict even for the best professional investors and fund managers. Euro Cost Averaging is a technique that reduces exposure to falling markets from investing a lump sum. If you buy in on a rising market, you will obviously buy less units, however when markets fall you will see big benefits from regular investing. In falling markets, your monthly investment will now purchase more units and as the price of units increases again in the next upturn, you will have more units in your fund to benefit from the higher price.
Investors will usually be better off in falling markets and in volatile markets but tend to be worse off in rising markets.