Unit Cost Averaging

Mutual funds are great for unit cost averaging thanks to their diversification abilities. You can use a mutual fund’s automated withdrawal program to engage in this method without manual entry. Unit cost averaging is often denoted by the currency, such as “dollar cost averaging”. Unit Cost Averaging occurs when you invest a little bit of money at a time. This process varies the prices for your purchases since you are buying at many different market points.

This is also the benefit of unit cost averaging: You are never investing heavily at one time. Instead of investing all of your funds in a lump sum, purchases are made in increments over a long time period. Your money is partially invested every week, two weeks, or month. As a result, some of your money buys in at the highest points of the markets, some at the lowest points, and some in between. In exchange you avoid investing all of the money into the market before a crash. You unfortunately also avoid placing all of your money into the market before a rally.

The benefit of using a mutual fund is cost and automation. Using this strategy with an equity portfolio equal to mutual funds in diversification would result in substantial commission fees. In a mutual fund, the commission cost is divided amongst all the investors in the fund instead of only you. You can use a fund’s automated investment program to routinely deposit a set amount per month into the mutual fund. This has the additional benefit of forcing you to invest instead of spending your money elsewhere.