According to Forbes magazine, Warren Buffet, the CEO of giant American investment fund Berkshire Hathaway, is the world’s second richest man. He’s made a fortune for himself and his fellow shareholders by investing in the world’s stock markets over many decades. The great stock market crash of 2008 began in September. Many people cringed when Buffet went back into the markets aggressively the following month, well before the markets bottomed in February this year. The point I’m trying to make is that if the world’s most successful investor of all time doesn’t know when the markets have bottomed, then what chance for the rest of us? It’s well-nigh impossible to second guess share price movements, and this is why I’m a keen advocate of unit cost averaging. The so-called drip-feeding approach, investing a little at a time, can be very beneficial whatever the markets are doing. It can make a big difference to the performance of a portfolio, whether it’s a lump sum investment or a regular savings plan generating a pot for retirement, school fees etc. This is how you can benefit from volatility and price fluctuations.

Volatility is inherent in equity investing. It’s important for you to realise that market fluctuations are normal and you should therefore be aware of the risks. Fluctuating share prices obviously mean that the unit prices of funds will also fluctuate, thereby impacting on the value of your portfolio. This is where a strategy of regular investing or drip-feeding really pays off.

The following example demonstrates what can happen when investing in periods of high volatility.

Example A:
Rising fund unit prices

Year	Price	Invested	Units bought
1	USD4.0	USD10,000	2,500.00
2	USD4.5	USD10,000	2,222.00
3	USD5.0	USD10,000	2,000.00
4	USD5.5	USD10,000	1,818.00
5	USD6.0	USD10,000	1,667.00
Totals		USD50,000	10,207.00

Value = 10,207.00 units at USD6 = USD61,242.00

Example B:
Fluctuating fund unit prices

Year	Price	Invested	Units bought
1	USD4.0	USD10,000	2,500.00
2	USD2.0	USD10,000	5,000.00
3	USD2.5	USD10,000	4,000.00
4	USD1.5	USD10,000	6,666.70
5	USD3.5	USD10,000	2,857.00
Totals		USD50,000	21,023.70

Value = 21,023.70 units at USD6 = USD73,582.95

Key points

• The effect of the fluctuating unit price has meant that Example B has ended up with a higher fund value than in a steadily increasing market. Even though the unit price is actually lower at the end of the example than it is at the start.
• To reap benefits from stock markets an investor need not necessarily have a large lump sum to invest.
• Unit cost averaging holds obvious benefits for investors making regular savings/premiums.
• It is important to consider the risks associated with all types of investment, particularly those associated with equity markets.

With the above in mind I think it appropriate to show again how the markets have performed over the recent past. As you can see there have been periods of high volatility. Unit cost averaging has worked during this time to great effect, and no doubt will do so again in the future.

The bigger picture
The case for investing in equities
Taking into account the effects of any short term volatility, the case for investing in equities remains as strong today as it has ever been for those investors with a long-term investment horizon. Over the last 25 years, an investment in the S&P 500 would have grown to almost 20 times its original value.