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Tuesday, August 24, 2010

What is Peso-Cost Averaging?

Peso- Cost Averaging is the process of buying, regardless of the share price, a fixed peso amount of a particular investment on a regular schedule. More shares are purchased when prices are low, and fewer shares are purchased when prices are high. The cost per share over time eventually averages out. This reduces the risk of investing a large amount in a single investment at the wrong time. And when it comes to implementing investment strategies based on peso-cost averaging, there may be no better investment vehicle than the one offered to by the CitisecOnline-It is pretty much the same as the mutual funds except that you are your own Fund Manager.

The amount of money invested at each interval remains the same over time, but the number of stocks purchased varies based on the market value of the stocks at the time of a purchase. When the markets are up, you buy fewer stocks per peso invested due to the higher cost per stocks. When the markets are down, the situation is reversed and you purchase a greater of number of stocks per peso invested. It's a strategic way to invest because you buy more stocks when the cost is low, so you get an average cost per share over time, meaning you don't have to invest the time and effort to monitor market movements and strategically time your investments.

Regardless of the amount of money that you invest, peso-cost averaging is a long-term strategy. While the financial markets are in a constant state of flux, they tend to move in the same general direction over fairly long periods of time. the ups and downs can last for months, if not years. Because of these trends, peso-cost averaging is generally not a particularly valuable short-term strategy.

On the other hand, over the course of a market cycle lasting five or 10 years and including the and downs of the market, the price of a given stock is likely to change significantly. Peso-cost averaging will help to ensure that your average cost per share represents both the premiums of the stocks when its high and the discount of the stock when the price is down, as opposed to just the premiums usually paid by investors in a market
that is in the upward trend.


Let's suppose that you just got a bonus and now have Php. 10,000 to invest. You decide to use Peso-cost averaging and spread the investment out over several months by investing Php 2,000 a month for the next five months. This averages the price over five months, so some months you may buy fewer shares, each at a higher price, and some months you may buy more shares, each at a lower price.
If the market is lower this month, you may lose money on the shares you bought last month, but this month you receive more shares, which, in the future, will help offset any losses. With peso -Cost averaging , you are able to take advantage of any low during these five months, guaranteeing you to invest at the very bottom because when it comes, you are simply doing what you do every month. Once the market turns around, which it is likely to do in the long term, you'll be ahead. The best part is you didn't have to do any predicting! No timing of the market involved.!

1 comment:

  1. hi Andy, yayaman ka dito ... hahah, salamat pala sa pasyal sa On This Side of Town... see you around.


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