Close this search box.

Investing using a Unit Cost Averaging strategy 

Rises and falls are part of normal stock market life. It can be easy to become preoccupied with the volatility and unpredictability of the financial markets and make hasty and rash decisions based on fear and emotion. Some people try to predict how the markets will react and switch their investments or try to buy at the bottom of the market, but the reality is very few achieve the correct timing.  

It is easy to panic in the short term as stock markets fluctuate, but it’s always important to focus on what your goal is and why you started investing.  The ultimate goal is to achieve your long-term financial plan. 

Seek Investing Advice  

We recommend that you seek the advice of your financial advisor before making any investment decisions.  

Regular Contribution Investments 

Saving a fixed amount regularly is an effective way to save and helps to ‘smooth out’ fluctuations in the market, and you get access to top fund managers for relatively small premiums. We call this method Unit Cost Averaging.  

What is Unit Cost Averaging? 

Unit cost averaging refers to saving a fixed amount regularly. It is an effective way to save and helps to ‘smooth out’ fluctuations in the value of your unit-linked savings plan. 

Market fluctuations affect the cost of the units in funds. A unit is basically a share in a fund. With every regular contribution you make, you purchase units or shares of the fund to the value of your contribution. When the fund price is low, it means you can purchase more units. Higher prices mean you purchase fewer units for your money. Over time, the more units you purchase, the more profit you will make when markets are favourable.  

By investing regular amounts into a long-term savings plan and making use of Unit Cost Averaging and the smoothing effect, your investments should grow at a better rate than trying to time the market with a once-off lump sum.  

Example showing the Effectiveness of a Unit Cost Averaging Strategy 

This example shows how ‘Unit Cost Averaging’ (UCA) works. John uses the UCA approach while Simon invests a lump sum at the start of the year.  

John invests £500 a month (£6,000) for one year into the fund. At the end of the year, John has acquired 7,530 units. Using the December unit price, the units have a value of £9,789 (7,530 x £1.30) 

Simon on the other hand invests a lump sum of £6,000 in January. His investment acquires 6,000 units in the same fund. By the end of the year, using the December price, the units have a value of £7,800 (6,000 x £1.30).  

As you can see, by spreading his investments over the year John has 7530 units above Simon’s 6000. This means when unit prices rise, John’s investment will be worth more and £1,989 better off than Simon’s. He has benefited from the effects of UCA. 

Please be aware this is only an example, in practice charges would apply for the management of the fund. These charges would have the effect of reducing potential returns. This example does not take into account inflation. 

 John Simon 
Month Invested amount (GBP) Fund Unit price Units purchased Invested amount (GBP) Fund Unit Price Units Purchased 
January 500 1.00 500 6000 1.00 6000 
February 500 1.10 455 1.10 
March 500 0.90 555 0.90 
April 500 0.80 625 0.80 
May 500 0.70 714 0.70 
June 500 0.60 833 0.60 
July 500 0.80 625 0.80 
August 500 1.00 500 1.00 
September 500 0.80 625 0.80 
October 500 0.50 1000 0.50 
November 500 0.70 714 0.70 
December 500 1.30 384 1.30 
Total 6000  7530 6000  6000 
Total Value £9,789 £7,800 

Benefits of Unit Cost Averaging 

  • It smooths out the extreme fluctuations of volatile markets. 
  • It lets you buy more units when markets are low, thus increasing the number of units in the fund. 
  • More units mean higher profits when markets perform well. 

Benefits of using a Regular Investment Savings Plan  

  • Allows investors to spread smaller investment amounts across a wider choice of funds. 
  • Access to top fund managers at lower costs. 
  • Purchase funds at lower costs than investing directly with the fund houses. 
  • Reduces administration as there aren’t multiple fund managers. 

Regular Reviews  

Regardless of stock market volatility, it’s important to review your investments on a regular basis to ensure they are still in line with your future goals and risk appetite. As your circumstances can change throughout your lifetime, you should review your chosen investment funds yearly to ensure they still meet your needs. The funds you choose to invest in now may not be right for you later in your life.  

Your financial advisor will recommend any adjustments or changes needed to your portfolio according to your current individual circumstances and financial goals. 

Finally, it is important to remember that inflation will reduce the spending power of any money you might get back in the future. 

Please note, the above is for educational purposes only and does not constitute advice. You should always contact your advisor for a personal consultation. 

* No liability can be accepted for any actions taken or refrained from being taken, as a result of reading the above. 

Explore More Articles Like This

Contact Us