Your investment will earn maximum return if you are able to decide when is the best time to buy and sell your investment assets. However, this method known as market timing is not easy as you will face the difficulty in deciding the perfect time to invest. For example, yesterday you bought Stock X because you feel that the price was very cheap as the price decreased by 5%. However, today you find out that the price of stock X decreases by 10% and you regret your decision because you have invested all your money on stock X yesterday.

To avoid this problem, it is recommended to apply an investment method known as cost averaging. Cost averaging is an investment technique done regularly and periodically without considering the economic and market conditions. By doing this, you do not have to be panic if the price of the basic needs rises or when the share price drops. By applying cost averaging method, you only need to invest a fixed amount of money regularly every month in a given period, so on average you will have lower average investment capital.

Why is that possible? It is possible because when the price rises, the value of your investment will be smaller. On the other hand, when the price declines, you will have higher investment value. If you combine and calculate the average of your investment, you will find lower buying price. With the tendency of increasing investment value in the long-term, you will gain benefits by applying this method. To gain more understanding of using this method, please consider the illustration bellow:

For example, you use cost averaging method on your investment in stock X with the investment amount of IDR 500.000 per month for 5 consecutive months. You always invest on the third day of the month. With the changing stock price everyday, bellow are the illustration (assuming you are able to purchase stock x in units):

From your investment result, the average purchase price is IDR 1942,50 ((2000+2100+1700+1800+2200+2300)/5) with the amount of stocks owned of 1287. If you sell all your shares on July, you will earn profit of (IDR 2300 x 1287) – IDR 2.500.000 = IDR 460.100.

Compare if you invest all your money IDR 2.500.000 on February, your purchase price would be IDR 2000 with the amount of stocks of  1250, and if you sell all your stocks on July, you will only earn profit of (IDR 2300 x 1250) – IDR 2.500.000 = IDR 375.000.

Please note that cost averaging does not guarantee you to get higher profit compared with other methods. By applying the market timing method, let’s assume you invested all your money IDR 2.500.000 on April. The purchase price would be IDR 1700 with the number of shares you own 1470. If you sell all your stocks on July, you will get higher profit, and the profit will be (IDR 2300 x 1470) - IDR 2.500.000 = IDR 881.000. However, as explained before, timing the market is not easy, because you may feel that the right market timing to enter the market is on February, not April.

As a result, cost averaging method is highly recommended for long term investment, mainly in the fluctuating market like the stocks market, as it may lower the risks on your investment.

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