Euro-cost averaging: how does it work?

We will all have seen some movies on the stock market, Wall Street to mention one, where people are shouting on the phone some numbers. We will have all read the last pages of the newspapers with a list of companies and their respective prices.

We have all listened to the news when they talk about markets going up or down. But very often, because of the complicated language and the overwhelming amount of information, we have decided that we are not in a movie, and thus investing is not for us.

It is also consuming and a bit scary to see your money, maybe savings you have put away slowly over time go up and down with the movements of the market. Trying to figure out the right time to invest is also super stressful.

Who could have ever imagined that a global pandemic would have forced us all at home and caused a huge drop in the market. I mean, not even the most acute imagination could have conceived the situation we are in today. Events like the one we are living today have been called Black Swans, they are very rare but it does not mean that they do not happen over time and predicting them is impossible.

So how can we invest and protect our money from these possible market events?

Simple, stop trying to be a trader and timing the market but choose a number of diversified indexes and invest in them using euro-cost averaging. Instead of accumulating a larger sum and investing all at once, you can start small and invest the same or a similar amount regularly over time.

For example instead of investing 1000€ all at once, think about investing 100€ every month or even better, 25€ every week. Why does this matter?

It provides protection when markets fall sharply as only the invested portion suffers a loss. Also investing when the market has dropped may imply a profit on these investments when the market picks up again.

How can you use euro-cost averaging to build an investment position?

1.Have a set amount of investment in mind

Should think about the goal you want to achieve and the timeline. You would like to invest about 1,000€ as you have never invested before? Or maybe you can think long term and think that you want to have 20,000€ invested?

2. You should have a time span in mind, and the longer the better

Going back to the example above, maybe the 1,000€ can be invested in your first year, and the long term goal of 20,000€ can be reached when your newborn child reaches the age to go to college but the timeline again is up to you. Just choose a timeline that is ambitious but achievable. Try to think that this money should not be disinvested for a longer period of time and should be left into your investment account except for an emergency.

3. Decide your recurring period

Choose how often you would like to invest, if daily, weekly or monthly or even quarterly. The more often you do this the better effects you will have on euro-cost averaging. Whatever you decide, choose something that is achievable and easy to implement. Oval has a very simple solution to automatically invest on a recurring basis weekly. But you can use the app with the timeline that works best for you.

4. Calculate your euro amount you are going to invest

You will just need to divide the amount you are looking to invest by the number of times you are going to invest (the timeline split by the recurring period). For example if you are going to invest the 1,000€ for 1 year on a weekly basis that is 1,000/52  = 19.23€ (or 20€ if you want to round it up). The 20,000€ over 19 years is going to equal an investment of 20.24€ per week. In Oval we made it easy, as you can set up this fixed amount as one of our steps and the app will invest it automatically in the indexes you have selected, regularly every week.

This way you can relax and watch the amount of money you have decided to invest according to your possibility, growing without having to worry about the movements in the stock market. A volatile market that has just dropped significantly may be a reason to start investing, so that you can avoid worrying about a further downfall and making the most of any upside if the market picks up.

Your capital is at risk, past performance is not indicative of future performance. Oval Money does not provide financial advice. If you need further information we suggest you look for expert advice.

Download the app


App Store Google Play