Peso
cost averaging
is an investment practice whereby you invest an unchanging peso amount at
regular intervals of your choice (preferably every month) into a specific
investment vehicle(s). This method puts time, your money, and the market all on
your side, regardless of what stock market does over the short term.
Some
people think they can time the market, that is: buying low and selling high.
But many have lost a lot of money trying to outguess it. If you took all the
money and made an outright purchase of stocks, you will not be as big a winner
as you had used the peso cost averaging technique. Let us say you have P12,000
you want to invest, and you know which stock you want to buy. You have been
watching it for some time, and you have seen it go as high as P15 a share.
Recently it has taken a tumble to P10. You think to yourself, now is the time
to buy. You invest all P12,000 at once making an outright purchase of 1,200
shares at P10 a share. One year later, your stock is selling at P5 a share. You
are down P5 a share, or you now have a paper loss of P6,000.
If
you had taken that same P12,000 and invested it using peso cost averaging, you’d
have invested the same amount of money month in, month out, regardless of what
market was doing. Here is how you would have come out in this exact same
scenario.
Month
|
Price
|
Shares Bought
|
1
|
P10
|
100
|
2
|
9
|
111
|
3
|
8
|
125
|
4
|
7
|
143
|
5
|
8
|
125
|
6
|
9
|
111
|
7
|
6
|
167
|
8
|
8
|
125
|
9
|
7
|
143
|
10
|
6
|
167
|
11
|
5
|
200
|
12
|
5
|
200
|
Summary: P12,000 invested; 1,717 shares bought
As
you can see, by using peso cost averaging, you are able to buy more shares of
stock when the price is low. So after one year you have a total of 1,717
shares, and even though the price per share is still down, at P5, your holdings
are worth P8,585 and your loss on paper is only P3,415, or about P2,585 less
than if you had purchased the stock outright.
Comparison:
P3,415
loss with peso cost averaging
P6,000
loss with outright purchase
In
upward market, your investment of that same amount in peso cost averaging
increases. When the price of the stock goes back to P10 a share, here is the
comparison. With the outright purchase, you investment will be worth the
original P12,000. But with peso cost averaging, you had accumulated 1,717
shares, or 517 more than if you had made an outright purchase. In this
scenario, when your share price is back up to P10, your, 1,717 shares will be
worth P17,170. This is P5,170 more than your original P12,000 investment, or
about a 43% on your money. With peso cost averaging, you limit your loss in a
down market, and when the price per share goes back up, you make more as well.
The key to this is that you are always buying more shares of your investment at
a lower price, as the above table shows.
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