Key Points

• Naira-cost averaging involves regularly investing a fixed amount, reducing the impact of market fluctuations. 
• This strategy lowers the average cost per share compared to lump-sum investments. 
• It helps build disciplined investing habits through regular contributions. 
• Consistent investing enables you to benefit from future market growth without attempting to predict highs and lows. 
• Naira-cost averaging helps prevent impulsive decisions by avoiding the chase for "hot stocks." 
• It’s a good strategy for new and long-term investors looking for a low-maintenance approach.

 

What Is Naira-Cost Averaging?

The term "naira-cost averaging" is derived from the popular investment term "dollar-cost averaging." It refers to investing a fixed amount of money at regular intervals, regardless of market trends. When the market is down, this strategy allows you to buy more units of your investment at a lower price, maximizing your potential to gain.

When markets are performing well, your existing investments gain value. The discipline of committing to the practice of investing regularly through naira-cost averaging allows you to stay consistent, avoid emotional reactions during market ups and downs, and take advantage of cost averaging over time. This approach eliminates the effects of short-term market changes by spreading the cost of your investments across different price points.

 

How Naira-Cost Averaging Works

Example: With Naira-Cost Averaging

Time	Amount	Share Price	Share purchased
January	N10,000	100	100
February	N10,000	80	125
March	N10,000	125	80
April	N10,000	80	125
May	N10,000	50	200
June	N10,000	100	100
Total	N60,000		730
Average Cost per Share		82

The table above shows how the Naira-cost averaging strategy can enable you to take advantage of a price decline in Months like February, April and May, significantly reducing the average cost for an individual share.

Despite buying at N125 in March, which was higher than the average price per share in the six-month duration, the average cost per share turned out to be N82, and the investor was able to purchase a total of 730 shares.

Example: Without Naira-Cost Averaging

Compared investing a lump sum in January, the first month, the average price per share would've been N100 for a total of 600 shares.

Time	Amount	Share price	Purchased share
January	60,000	100	600

 

Benefits of Naira-Cost Averaging

• Significantly reduces the cost per share you purchased
• Setting up automatic, regular contributions to your investments helps create positive investing habits. Even if you know you should invest consistently, it can sometimes be tempting to use that money elsewhere. By developing this habit of investing at consistent intervals, you’re less likely to notice the money leaving your account, more likely to build discipline, and more likely to stay on track with your investment goals.
• Naira-cost averaging keeps you prepared for potential gains, as it prevents you from trying to predict the market's highs and lows, which is nearly impossible even for experts. By investing steadily, you're ready to benefit when the market improves. For example, if you had stopped investing in April 2024 amid inflation fears and a declining market, you might have regretted it later when the market rebounded to record levels. This approach helps you stay focused and allows your investments to grow over time without relying on market timing.
• It can help you avoid chasing "hot stocks." Many investors get caught up in trends, focusing on popular stocks or the latest investment fads, often leading to taking on more risk than needed to reach their financial goals. This behaviour can cause overconfidence when markets are going up and panic when the market falls. Following a steady investing plan, like naira-cost averaging, can help you stick to your strategy and avoid impulsive decisions based on market fluctuations.

 

Getting Started with Naira-Cost Averaging

Set a budget for how much you want to invest as well as the intervals and frequency. For example, you could decide to invest N50,000 each month for the next 10 years.

Three main components of Naira-cost averaging

1. The fixed amount you plan to invest 
2. How frequently and consistently you are investing the said amount 
3. A reliable brokerage firm like CSL Stockbrokers to oversee your investment strategy and help you achieve your financial goal

 

Who Should Use Naira-Cost Averaging?

Naira-cost averaging is a strategy any investor can use to reap benefits such as potentially lowering the average investment cost, setting up automatic investments at regular intervals, and easing the stress of making purchasing decisions during market volatility. This approach allows for steady investing without the pressure of timing the market perfectly.

Naira-cost averaging can be particularly beneficial for new investors who may lack the experience to identify the best times to buy. This strategy, over time, allows them to invest consistently, minimizing the need to time the market accurately.

Naira-cost averaging can also be an effective strategy for long-term investors who are committed to investing consistently but prefer not to monitor the market closely to time their purchases.

 

Conclusion

Naira-cost averaging is a powerful and simple investment strategy, allowing you to steadily build your portfolio without the need to time the market. By consistently investing a fixed amount, this approach can reduce the average cost of your investments and help you avoid emotional reactions to market trends. It’s suitable for all investors, particularly those looking to develop disciplined investing habits and grow their wealth over the long term. With this strategy, you can benefit from market growth while minimizing the impact of temporary market dips, keeping you on track to achieve your financial goals.

 

 

 

 

 

Important Risk Warnings and Disclaimers
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