Can Cost Averaging Method Also Lose Money?

Post category:Basics / COL Financial
Post last modified:May 8, 2012
Post comments:1 Comment

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Can Cost Averaging Method Also Lose Money?

Here’s one question from one investor who’s curious on how cost averaging can possibly also lead to a decline in your investment.

I have a friend in Canada who invested in mutual funds in 1990s. He lost money even if it was cost-averaging strategy. How can this be possible?

Here is a short answer from our friend Aya Laraya:

Cost Averaging is a strategy to minimize potential losses PROVIDED that the instrument you are cost-averaging is NOT junk. If you cost-average junk, you will still lose money.A Mutual Fund is no guarantee that you will make money and if the Mutual Fund invests in bad securities, then the investors lose money. The biggest assumption in a Mutual Fund is that you ASSUME that the fund manager KNOWS what he is doing. Unfortunately, there are good fund managers and bad fund managers so if you end up with a bad fund manager who invests in bad securities, then you will lose money REGARDLESS of the investment strategy you employ.

The key then is to carefully choose the investment into which you’ll use the cost averaging method.
Make sure that you use its power to empower your investments!

You may have the best technique, but if you’re going to take it the wrong way, then it’s futile sticking to the strategy.

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