There an old children’s nursery rhyme – The Grand Old Duke of York – with a verse that goes:
When they were up, they were up. And when they were down, they were down. But when they were only half-way up, They were neither up nor down!
That could have been written about investments! It’s all about timing.
If you are saving on a regular basis through a fund, the price of the investments you acquire will vary according to their value when you buy. Sometimes they will be up, other times they will be down. Sometimes they will be neither up nor down. When they are up, you get fewer units for your money and when they are down you get more units for your money. Simple, really.
But what you might forget is that it’s not just the final unit price that matters when you want to cash in your savings, it’s also the number of units you have acquired that you sell at that price.
This is what’s known as the unit cost averaging effect.
So if you have a regular savings plan and you hear on the news that the stock market is down, don’t panic. You will now be buying more units at a cheaper price and saving them for the day you want to cash in. Remember, we’re thinking long term here. It follows then that the current price when you want to cash isn’t the critical price. It doesn’t even have to be higher than the price you paid when you started investing. If the price when you want to cash in is higher than the average price over the term of your investment, you are up. If it’s not, just like with the British weather, wait a bit and the sun will shine again.
Before you know it, the price will be higher than the average and you will be up again.
If prices are at their highest when you cash in, you are up. If they are only half-way up or down when you cash in, you could be up too, as you will have more units to sell.
That’s where the Duke went wrong.