Sometimes we have an inflow of cash and don’t know if investing it immediately will ensure that we buy at the right prices.
Some of the best investors have recommended investing in averages will make you better in the long term than most of those who buy and sell frequently, if you do not have the time to do a proper research on a stock.
What is Naira Cost Averaging?
Naira Cost Averaging (NCA) is an investment technique of buying fixed amounts of a particular asset on a regular schedule, regardless of price. The investor purchases more of the asset when prices are low and less when prices are high (but always the same fixed amount).
For example, if you want to buy shares of a company you like, applying NCA means will require you invest the same amount of money over a period of time; say monthly, quarterly, yearly, or even indefinitely. The essence of NCA is to reduce the average cost per share of an investment and reduce the risk of buying at the wrong time.
What Type of Investments can Naira Cost Averaging be used for?
NCA can be used for mutual funds, index funds, stocks, and Bitcoins.
How Naira Cost Averaging Works
The table below shows an example of how Naira Cost Averaging works when buying shares. Let’s assume Ade contributes N25,000 monthly to buy shares of XYZ stock for a 6 month period. Ade invested a total sum of N150,000 for 6 months, however due to the volatile nature of stocks, prices swung between highs and lows over the period, the average price Ade paid was N7.39.
Ade ended up paying an average price of N7.39 which was higher than the N7 he initially paid when he first bought the stock. Worthy of note is the fact that the average price Ade paid was lower than the highest price of XYZ within the 6 month period (N8.5).
What NCA did for Ade is that it helped him take advantage of fluctuations in the market as the value of the stock changed. He therefore ended up with a gain of N24,565 within the period.
Benefits of Naira Cost Averaging Strategy
- It encourages consistent investing and prevents short-term movement in prices of assets to force an investor to make emotion-based decisions that could harm the conservative long-term strategy.
- It helps smooth out the risk that you are buying at high prices.
Disadvantages of Naira Cost Averaging Strategy
- The possibility of losing out on the opportunity to make gains if you had invested a huge sum of money and the price of your asset rises to high levels. The good thing is that you don’t have to feel bad because no one is an expert at timing the market.
- You will incur trading costs for each purchase you make.
- NCA does not guarantee that you will make profits on your investments.
You can start Naira Cost Averaging on your investments today, it isn’t entirely difficult, all you need do is to ensure you keep investing consistently and train your mind to ignore market movements, by also deciding to be in for the long term.