What You Need To Know About: $,€ and £ Cost Averaging

Investing on a regular basis has less risk than capital investment as the risk of poorly timed investment is reduced. Currency Cost Averaging is a significant benefit to regular savers but what is it and how does it work? Whether you are investing in Sterling, Dollars, Euros or Yen the principles are the same…

Currency cost averaging is the investment of fixed currency amount on a regular basis regardless of the price of the units or shares purchased. When the market price goes down the number of units bought that month is greater and when the price goes up fewer units are bought. The rationale is that the average price paid for units will be lower than the current average price. Here’s an example:

Month Amount Price Units Bought
1 $1,000 $0.25 4,000
2 $1,000 $0.50 2,000
3 $1,000 $0.75 1,333
4 $1,000 $1.00 1,000
TOTAL $4,000 8,333

So how does it work and why? (Apologies in advance but this contains a bit of maths.)

Using the figures above, the average unit price paid is $0.625 ((0.25+0.50+0.75+1.00)/4.) This is known as the arithmetic mean. However if the total invested ($4,000) is divided by the total number of units (8,333) the average is $0.48 (4000/8333.) This is known as the harmonic mean.

Why is this important? To use the jargon: currency cost averaging exploits the differences between the arithmetic mean and the harmonic mean. The harmonic mean is always lower than the arithmetic mean for any given set of numbers. This makes it easier for a regular saver to make a profit at any given future unit price and which is a benefit to regular savers.

If you have and questions, comments or ideas for future posts please let me know.