Assuming same budget, if we invest regularly by buying one board lot regardless of stock price, we end up getting higher gains compared to just buying one time big time. Buying only at the start does not give one the opportunity to take advantage of the low prices from Jul12-Nov12. (This works as a general principle but of course there will be exceptional stocks movements and scenarios. But the question is, how often can we spot exceptional stocks and/or movements?)
- In stocks, there are board lots required as such lower prices but same investment amount does not mean you can buy more shares (one example online does not consider board lots tsk tsk). Unless you plan on buying odd-lots. So in general, cost-averaging impacts purchase price but not number of shares given the board lot rules.
- More frequent buying makes one victim of higher transaction fees.
- Nonetheless, in spite of higher fees, the regular investment still emerges with the better yield. Difference in this example may not be that much but for trends with deep corrections and recoveries, cost-averaging will be very effective (see below example).
- Beside this saves you the emotional cost of trying to time your entry or worrying about the plunge in prices after you invested in May-12.
Better Simulation: UITF
Same exercise but this time for UITF. I think cost-averaging works better for UITF (or VUL) more than for stocks. Why is that?Because impact is not only on purchase price, but more so, it enables the investor to purchase more units at the same investment amount. Impact may not be significant based on below example, but in the long run, the more units you have determines the portfolio size, more than the price.
At same amount of Php55k, cost averaging can buy 12.35k units whereas buying one time big time only gives 12.09k units. In the long run, this 300 units difference can create a significant difference.Some notes:
- Cost averaging can be more effective for investments that are units-based and not subject to board lots restrictions, such as mutual funds, UITF or variable unit-linked insurance.
- Further, these types usually have no fees incurred for frequent transactions, hence frequent regular investing is not costly.
- More units bought means more units can earn in the future. With this, both price appreciation and higher number of units contribute to better returns.
Just to drive the point. In the unfortunate incident that you decided to go “all in” with a stock that was very promising, like a blooming flower or lady. Then the market decided to dump it. Well I hope if you see this plunge you would have gotten out before it reached Php9 by May12. But if you did not have the time to check on the market again, sorry.
Exaggerated? Maybe yes, maybe not. Anyway, at the end of the day, it’s your money. I’ll guard mine