Peso Cost Averaging

By Cheryl Sperling

Last time, we were talking about investing in mutual funds. Some will be asking when is the best time to invest and how often do we invest? Well, there's is no best time to invest than NOW! The sooner we start investing, the better, due to the power of compounding or the rule of 72. We invest even when the market is down, or the market is up, or when there is a political chaos, or when there is political peace and quite. We may hear that we should time the market, but in the following chart below, it will illustrate three (3) scenarios of different market conditions in the stock market.

Peso Cost Averaging. Like saving, we should make investing a regular habit. We should invest regularly, say monthly at a fixed amount! This is what we call as peso cost averaging. By doing so, we minimize or reduce the risk of our investment when the market goes up and down, or simply said whether the prices of stocks are high or when the prices are down. "Save as fast as you can while you can."

                                                         *Courtesy of IMG

In the illustration, an investor, Mr. A, decided or planned to invest 100 pesos every month for 6 months: (Today, or at present, we can start investing in mutual funds starting at
P5,000- (that's the minimum) and then succeeding investment could be as low as P1,000-.)

Scenario 1:  Mr. A, on the 1st month bought, mutual fund shares for P10. With P100 to invest, he was able to buy 10 shares. On the 2nd month, the market goes up , so the price of the shares went up as well, to P12. At P12, his P100 will be able to buy 8.33 shares. On the following months, shares went higher. On the 3rd month, his P100 was able to buy 7.14 shares only as the price per share went up to 14 pesos. On the 4th month, he bought again mutual fund and his P100 was able to buy 6.25 shares when the price was P16-. On the 5th month, he invested P100 again but the price per share was at P18 already, so his number of shares bought was only 5.56 shares. And on the 6th month, the price went higher to P20 per share; and so his P100, bought him 5 shares. Now for comparison purposes, lets assume that Mr. A, will sell of redeem his mutual funds at the current price of P20. From the chart, if we total his number of shares, it will be 42.28 in all. So, 42.28 shares multiplied by the price of P20, then he will have P845.60 in total; meaning to say his P600 investment (that is, P100 invested monthly for the last 6 months) gained P245.60 or 41% over 6 months or 6.8% per month. That's good, right?

Scenario 2: In this scenario, the prices of the mutual fund started at P10, on the 1st month, went down to P7 on the 2nd month, then went down again to P5 on the 3rd month, but went up to P6 on the 4th month, and then P7 again on the 5th month, and finally became P10 on the 6th month. Correspondingly, the number of shares bought by Mr. A. for his P100 investment, was 10 shares, 14.29 shares, 20 shares, 16.67 shares, 14.29 shares and finally 10 shares on the 6th month. He decided to redeem all his shares, total of 85.25 at P10 per share on the 6th month, which amounted to P825.50 or in short, he gained P252.50 or 42% over 6 months. This is a better wield than the first scenario when the market just went up.

Scenario 3: Here the market goes down and never came back to where it first started. The prices of shares was at P10 when Mr. A., first bought his shares for his P100 investment, then it went down abruptly to  P4, then P2, then P1, then went up a bit to P2 again, and finally on the 6th month stayed at P4.50. The corresponding shares were, 10 shares @ P10, 25 shares @ P4, 50 shares @ P2, 100 shares when the price was P1, and then 50 shares again @ P2 and finally 22.22 shares when it was at P4.50. So, computing, Mr. A gained P557.49 during the past 6 months or 92.9% over 6 months or 15.5% per month.

In conclusion, timing the market is not really that important when you do your peso cost averaging.

In order for your investment to grow, invest regularly a specific amount that you can afford on a regular basis, say every month, on an investment that will be in tune to your investment appetite or personality.

 TIME, not TIMING is the better ally to help build wealth for your family. Building Wealth requires a lot of Discipline and Time. This is not a get-rich-quick- scheme.