It’s pure pain to watch someone suffer from losing all his investments due to a falling market. What to do?
It’s too easy to say, just hold on because markets recover all the time. Curious Capitalist over at Time.com points that the best response is no response, but active investors know that once you lose all the bets, you waste so much of the capital that you can’t get in when real opportunities come up.
Last week, I spoke with several investment guys who espouse peso-cost averaging. The moneysmarts definition of that is “pikit-mata” investing, where you keep setting aside the same amount of money regularly — monthly or quarterly — whether the market is up or down.
The idea is you buy more when the market is down. While you buy fewer shares with the same amount of money as the market rises, those who promote this investing style says it all bunches out in the end to your favor. Meaning the average cost is lower than if you buy everything all in one go.
This is conventional wisdom that you’ll find in most investing books. But there are critics that say it’s not what it’s trumped up to be. If you got a big whopper of cash, for example, and the market is starting to come up from a downturn, why do you have to chop it all up to buy P5,000 worth of stocks each month? They also say its just a sales strategy to ferret out money from people that would rather not buy because the market is down.
Mathematically, peso-cost averaging doesn’t make sense when the market is going up. If you buy a big load of shares just before it goes up, naturally, you’ll make more money. Juanis Barredo, vice-president of CitisecOnline.com, pointed out that what you’ll have in this scenario is a big jackpot.
The problem is that striking gold is not as easy as it sounds. Barredo says for passive investors, peso-cost averaging works. MoneySmarts says if it gets you to invest money you would end up spending on restaurant dinners and shoes and whatnots, then why not?
Of course, this assumes you fully understand the nature of investing in stocks — earnings are never guaranteed and the higher returns are matched by equally high risks of loss.
Feast your eyes on this illustration on what happens with peso-cost averaging. Then watch out for my full-blown article next Monday in the Philippine Daily Inquirer.
July 1st, 2008 at 3:29 pm
my mutual funds are down by as much as 24% YoY. divest ko na mga older certificates ko. stop the bleeding.
June 30th, 2008 at 5:17 pm
Hi Salve, it breaks my heart to read about advice like this on a newspaper without any sort of disclaimer or more information on the matter. I love your column most of the time but I think posting something like this just like that may be a bad idea. Do you know how many less informed investors read this? It’s almost tantamount to promoting a get-rich quick scheme. Without talking about investment basics, risk-reward scenarios, diversification, and asset and stock selection stuff (which financial advisors are obligated to do before recommending any sort of scheme) you may be leading your readers astray. Posting that big statement of how stock returns outpace inflation may be statistically true, but it may mislead people with regards to the true risk of stock investing.
June 30th, 2008 at 2:25 pm
i wish i can also strike gold there. I only played the stock exchange game a few months back, got a 10% ROI, when the market fell due to a political scandal…
no real money involved…one of these days I will try the real thing