Naira Cost Averaging

Naira cost averaging is a good strategy for beginners. It involves regular contributions of a fixed naira amount to a portfolio or specific investment. At each interval, the chosen amount is invested, removing any emotional motivation to react to short-term changes in the value of the investment. Of course naira cost averaging does not guarantee a profit, it does encourage consistent investing and prevents short-term movement from leading investors to make emotion-base decisions that could harm their long-term strategy. Because the investment is purchased at a range of prices over time, fluctuations in price are evened and the initial price has a far smaller impact on the returns at the time the investment is sold. The average price paid trends toward the current price at each interval. As a result, the gap between the value of the money paid in and the current value of the investment decreases. However, the average price does not move fast enough to completely eliminate the possibility of profit of loss. Although negative gap from growing between the price paid and the current price, it limits the potential for a positive gap in the same way.
Essentially, naira cost averaging is ideal for investors who wish to eliminate the risk associated with timing the price of an investment and reaction to short – term results at the expense of limiting themselves to a decidedly conservative strategy. Some investors believe naira – cost averaging is most effective when a stock is under-performed because more shares can be acquired for the same regular investments amount. However, better performance is not guaranteed and that aspect should not be the primary motivation for adopting this strategy.