Bonds and Shares
09/04/2016
Cost averaging in investments

Investing regular amounts in a share or fund is an effective way to decrease your risk exposure in the long term.

Cost averaging is the technique used when buying shares or funds’ units in equal amounts and at regular intervals, regardless of the price. More shares/units are purchased when prices are low, and fewer shares are bought when prices are high. One way to achieve this is to spread or drip-feed one’s lump sum into the market rather than investing it all in one go. If you have a large sum of money and invest it all at once, you face the risk of declining financial markets taking a huge chunk out of your portfolio.

Regardless of the amount of money that you have to invest, one has to keep in mind that cost averaging is a long-term strategy. While the financial markets are in a constant state of flux, they tend to move in the same general direction over fairly long periods of time. Bear markets (a market condition in which the prices of securities are falling) and bull markets (markets that are on the rise) can last for months, if not years. Because of these trends, cost averaging is generally not a particularly valuable short-term strategy.

On the other hand, over the course of a market cycle lasting 5 or 10 years and including a bull market and a bear market, the price of a given security is likely to change significantly. Cost averaging will help to ensure that your average cost per share represents both the premiums of a bull market and the discounts of a bear market, as opposed to just the premiums usually paid by investors in a bull market.

We are currently experiencing a scenario of falling markets (bear markets) and we meet a lot of investors concerned about their investment portfolios, even though they are aware that such investments including our Model Portfolios, which we have mentioned and explained in past articles, need to be looked at as a medium to long-term investment and investors should avoid taking panicked decisions. Remember that our Model Portfolios are composed of 10 to 11 different mutual funds that invest in different asset classes, across a range of industry sectors and geographical regions (mainly the US, Europe and Asia). Each one of these mutual funds, which are carefully selected by Mediterranean Bank and Morningstar on the basis of their past performance and future prospects, has a fund manager who actively manages the fund’s assets and aims for good and consistent fund performance.

The market scenario that we are currently experiencing may be looked at as a good investment opportunity. An investor can benefit from falling markets, but how can one do that?

The technique of the cost averaging is one of the most suitable strategies that one can benefit from under the current market conditions.

Let’s consider an example. An investor bought 1,000 units 6 months ago at the price of €5.00 per unit. Due to falling markets, the price has gone down to say €4.00 per unit.

  • Original Amount Invested = €5,000
  • Current Market Value of Investment = €4,000

What are the options for the investor considering the current scenario?

Option 1: Wait and hold on to the investment until the markets recover which may or may not take long to happen.

Option 2: Buy another 1,000 units at the current price of €4.00 for 20% less of the original cost. With the second acquisition the investor holds 2,000 units for a total cost of €9,000 or at an average cost of €4.50 per unit. Eventually, when the market recovers, the person who has adopted a cost averaging strategy will see the investment recuperate quicker than one who has not taken such an approach.

The advantages are clear: by investing a given amount over time and in equally sized chunks rather than all at once, the investor ends up buying more shares when prices become cheaper, though fewer when they become more expensive.

However, it is worth bearing in mind that if the market rallies whilst you are cost-averaging into it, you may lose out on any gains you may have made by investing the total amount right away. When considering cost averaging it is also important to consider the brokerage fees payable since multiple brokerage fees will result in decreased profits than the lump-sum method of investing due to the higher costs involved.

Although a study undertaken by investment management company Vanguard in 2012 established that lump-sum investing resulted in higher long-term profits than cost averaging two-thirds of the time, it is worth considering that in a bear market, such as the one we are experiencing at the moment, cost-averaging allows you to limit your risk exposure by keeping some of your money in cash.

 

This article is intended as a guide to provide readers with useful information and to improve their knowledge of investments, though it does not constitute and should not be treated as investment advice. The price of all investments can go up as well as down, and past performance is not indicative of future performance.

 


 

Il-cost averaging fl-investimenti

It-teknika tal-cost averaging tintuża l-aktar fix-xiri tal-investimenti f’ammonti ndaqs u f’intervalli regolari, irrispettivament mill-prezz. Aktar units jew ishma jinxtraw meta l-prezzijiet ikunu baxxi, u inqas ishma jinxtraw meta l-prezzijiet ikunu għoljin. Mod wieħed kif tikseb dan hu billi tqassam il-kapital f’fażijiet, minflok tinvesti kollox f’daqqa u f’darba. Jekk ikollok somma kbira ta’ flus u tinvestiha kollha f’daqqa, tkun qed tissogra li meta s-swieq finanzjarji ma jkunux sejrin tajjeb tista’ titlef mill-valur tal-portafoll tal-investiment tiegħek.

Irrispettivament mill-ammont tal-flus li trid tinvesti, tajjeb inżommu f’moħħna li l-cost averaging hi strateġija fit-tul. Filwaqt li s-swieq finanzjarji jibqgħu, kontinwament, telgħin u niżlin, għandhom it-tendenza li jimxu fl-istess direzzjoni ġenerali f’perjodu relattivament twil fiż-żmien. Il-bull markets (jiġifieri meta l-prezzijiet tal-ishma jkunu niżlin) u l-bull markets (meta l-prezzijiet tas-suq ikunu telgħin) jistgħu jdumu hekk għal xhur sħaħ, jekk mhux snin. Hu propju għalhekk li l-cost averaging hija strateġija fit-tul.

Bħalissa qegħdin f’xenarju ta’ swieq li qed jaqgħu (jew kif inhu msejjaħ bear markets) u niltaqgħu ma’ ħafna investituri mħassbin fuq il-portafolli tal-investiment tagħhom, anke jekk ikunu konxji li l-investimenti tagħhom, inklużi l- Model Portfolios tagħna, li semmejna u spjegajna f’artikli fil-passat, għandhom iħarsu lejhom bħala investiment fit-tul u li m’għandhomx jittieħdu deċiżjonijiet ta’ għaġġla u paniku dwarhom. Il-Model Portfolios tagħna huma magħmula minn 10 sa 11-il mutual fund differenti li jinvestu fi klassijiet ta’ assi differenti, f’firxa wiesgħa ta’ setturi industrijali u reġjuni ġeografiċi, partikolarment, l-Istati Uniti, l-Ewropa u l-Asja. Kull wieħed minn dawn il-Mutual Funds huma magħżula bir-reqqa minn Mediterranean Bank u minn Morningstar, abbażi tar-riżultati li jkunu kisbu fil-passat u l-prospetti tagħhom għall-ġejjieni, waqt li jkollhom fund manager li jimmaniġġja b’mod attiv il-fond u li l-għan tiegħu hu li jikseb riżultati tajbin b’mod konsistenti.

Ix-xenarju attwali tas-swieq li għaddejjin minnu bħalissa, wieħed jista’ jħares lejh bħala opportunita’ għall-investiment. Dan għaliex l-investitur jista’ jiggwadanja meta s-swieq ikunu niżlin. Tgħidu kif jista’ jkun dan?

It-teknika tal-‘cost averaging’ hi waħda mill-aktar strateġiji xierqa li wieħed jista’ jgawdi minnha fil-kundizzjonijiet attwali tas-suq. Ejja nieħdu eżempju:

Nagħmlu mod investitur xtara 1,000 unit, 6 xhur ilu, b’ħames ewro (€5.00) kull unit. Minħabba li s-swieq qed jaqgħu, il-prezz tagħhom waqa’, ngħidu aħna, għal erba’ ewro (€4.00) l-unit.

Mela:

  • L-Ammont Oriġinali Investit kien ta’ €5,000
  • Il-Valur Attwali fis-Suq huwa issa ta’ €4,000

X’inhuma l-għażliet tal-investitur meta tqis is-sitwazzjoni attwali tas-suq?

L-ewwel għażla: hija li tistenna u ma tmissx l-investiment sakemm tara li s-swieq ikunu rkupraw. Dan jista’ ma jdumx ma jseħħ u jista’ jdum.

It-tieni għażla: tista’ tkun li tixtri 1,000 unit oħra bil-prezz attwali ta’ €4.00 kull unit, li tfisser 20% inqas min-nefqa oriġinali. B’dan it-tieni akkwist b’kollox tkun qed tikseb 2,000 unit, bi spiża totali ta’ €9,000 jew b’nefqa medja (average cost) ta’ €4.50 kull unit. Eventwalment, meta s-swieq jibdew telgħin, min ikun adotta din l-istrateġija tal-cost averaging jibda jara l-investiment tiegħu jirkupra aktar malajr minn dak l-investitur li ma jkunx għamel dan.

Il-vantaġġi huma ċari: meta tinvesti somom ta’ flus għal perjodu ta’ żmien u f’ammonti ndaqs, aktar milli somma kbira waħda f’daqqa, bħala investitur tispiċċa tixtri aktar ishma meta l-prezzijiet jinżlu għalkemm tixtri inqas ishma meta l-prezz tagħhom jogħla.

Għalhekk, minkejja l-idea li l-cost averaging normalment hu l-aħjar mod kif tinvesti, hemm prezz xi tħallas meta żżomm il-flus kontanti jistennew sakemm tinvestihom fis-suq. Jekk il-prezz tas-suq jogħla meta tkun qed tħaddem din l-istrateġija, tkun tlift il-qligħ li kont tagħmel kieku investejt l-ammont tal-flus kollu f’daqqa.

Fil-fatt, studju li sar fl-2012 mill-kumpanija għall-immaniġġjar tal-investimenti, Vanguard, wera li, bħala medja, l-investiment ta’ somma flus f’daqqa fuq perjodu twil irendi aktar mill-cost averaging kważi f’żewġ terzi tad-drabi. Madankollu, hemm punt importanti favur il-cost averaging. Jekk tkun qed tbassar li s-suq se jinżel, kif qed nesperjenzaw bħalissa, l-istrateġija tal-cost averaging hi għażla aħjar. Meta tinvesti flusek f’intervalli regolari, aktarx li tkun qed tillimita r-riskju tiegħek għax tkun qed iżżomm ftit mill-flusek f’cash, jew jekk tippreferu, flus kontanti.

Fattur tal-aħħar li tajjeb nikkunsidraw hu dak tal-ispejjeż marbuta mal-investimenti, li jistgħu jkunu ta’ vantaġġ fuq il-metodu ta’ investiment ta’ somma kbira ta’ flus f’daqqa. Ngħidu aħna, meta tuża l-cost averaging tkun trid tħallas charges kull darba li tixtri l-ishma ta’ stock jew funds f’lottijiet differenti, flok f’daqqa. Din il-ħaġa tista’ tnaqqar mid-dħul tiegħek meta tqabbilha mad-dħul li tikseb mill-metodu ta’ investiment b’somma kbira ta’ flus f’daqqa.

 

L-artiklu jgħati gwida b’informazzjoni utli kif inżidu l-għarfien tagħna dwar l-investimenti, għalkemm ma jikkostitwixxix u mghandhux jiġi ttrattat bħala parir dwar l-investimenti. Il-valur ta’ l-investimenti jista’ jitla’ jew jinżel u l-passat mhux garanzija tal-futur.

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