I’ve read your #10Steps book. You discussed both these options but I just want to ask your honest personal opinion, which is the better option: peso-cost-averaging or one time investment, specifically for a waiting period of 10 years? Thanks a lot!
-DS22 via #AskGeri email
Thank you for reading my book. Yes, an extensive chapter in the #10Steps book talks about the various investment options for every Juan (where to invest) as well as possible strategies (how to invest). As for your question, unfortunately, there is no definitive answer to it, but good thing you only asked for my opinion! LOL.
Each has it’s own pros and cons, so let me try my best to discuss them here. Nonetheless, choosing which one is better is relative, it has to be which one is better FOR YOU — this means more suitable for you depending on your investment Objectives, Horizon and Appetite (OHA).
Timing. A one off investment would need good timing, preferably when the investment is at the lows rather than the highs. Assuming we’re talking about stocks here. As for bonds, it will really be a one-off. But usually for stocks, we only discover the lows and the highs in hindsight, that is why Juan who is investing right now can only hazard a guess that his investment will be profitable in 10 year’s time. They say if it’s a good company, chances are high, but caveat, not all good companies remain good in 10 years.
In this sense, there is an element of emotion involved and Juan has to keep this in check– is he buying when everything is going up, almost euphoric (possibly greed) or does he have the balls to buy when all prices are falling (possibly fear).
Amount. How much can you park one time that you’ll never ever need in 10 years time? If you have such a sizable amount, say P500K or P1M, do you have a large enough psychological wallet to invest this all-in? In some sense this is like getting a franchised business that has a 5 year contract, you cash out a big amount one time and cross your fingers that it works.
If you just have say 10K a month or less, then you can do a one-off granted that investment is still relatively low (i.e. like the stock market today) but in the same manner, the 10K you invested should be sufficient for the objective you have 10 years from now (if it’s for retirement, the profits in P10K in 10 years is likely not enough for retirement).
Monitoring. I would say there is less monitoring involved in a one-of investment but monitoring is still essential. Maybe not monthly or semi-annually but it would be good if Juan still checks his investments at least annually and see how it fared. In fact, before putting that lump sum investment, he should have exit strategies in place. What will he do if the investment is down 10%? 20%? 50%? Normally, we taper off from riskier investments as the objective approaches (e.g. if you are retiring soon, not all your retirement funds should be in the stock market, you should be slowly transitioning to fixed-income securities).
Expertise. Not much needed as long as you have the budget. Doesn’t mean you will invest blindly though. This just means Juan will need less competence (in terms of fundamentals and technicals) in doing one-off investment compared to daily trading.
Timing. Cost-averaging (CA) aims to mitigate the timing factor by investing smaller amounts in a regular interval, precisely to remove the timing factor in the investors’ decision-making. This is like an automated investing wherein every month, or every 15th or 30th, one buys the particular investment regardless if the current sentiment is bullish or bearish. In this sense, there is less emotion involved since buying is automated, whatever the market condition is, Juan is buying at that point in time. Anyway it’s long term right? For me, there is much room for improvement in this strategy.
Amount. Retail investors and newbies find CA attractive because they have smaller amounts available and there is money coming in regularly. So instead of saving the small amounts first and accumulate P1M before investing, they prefer investing P5K to P10K monthly now and let time and compounding do its magic. This tends to work granted that the chosen investment is highly probable to grow within 10 years.
Monitoring. Even though CA is sort of automated, there is still monitoring to be done and this shall be more frequent than a one-off investment. Monitoring in terms of whether your monthly investments are being executed by the bank for example, or whether you should add more during market pullbacks and short term corrections. What do you do if your investment is losing 10%? 20%? 50%? These plans should be in place even prior to starting the investment.
Expertise. If you will do CA on your own, you’ll need a little more experience and expertise than a one-off investment because you will be the one in charge of buying at regular intervals. That is why most retail investors enroll in EIP, or regular subscription, etc so that a 3rd party (bank or broker) will do the regular buying for them. That way, no emotions involved, you won’t forget or hesitate to pull the trigger when buying time comes even if the market is bloodied. Likewise, if a 3rd party does this for them, they don’t have to learn the ins and outs of the market? Is that good? Depends, for me it’s not good because I prefer to do the trading on my own, but there’s no denying that not all people want to learn the stock market. They’d rather let the “experts” do it for them. That way, they should be mindful of the risks they are taking.
Remember, being long term does not remove the risks. In fact, the longer your money is in the market, the more exposed it is to risks. Being long term only saves you some headache and heartache in terms of the volatility, the ups and downs of the market, the zigzag it took to get to higher levels. Assuming it does go up indeed, because not all investments go up in time.
WHAT I DO?
I don’t do one-off unless it’s a business. But for the markets, I do CA for managed funds (since I started working), but I trade stocks. I don’t do CA for stocks because I want to learn, I know I can do better, and I want to trade, as Ed Sheeran sings, until we’re 70. I don’t do one-off for stocks, I still monitor them, but I ride my gains. I have a short to medium term portfolio and a core holding for our married fund. But it doesn’t mean I wont’ sell in 10 years time.
Again, it all boils down to Juan’s investment OHA. What is it that he wants to achieve at the end of 10 years? Retirement? House and lot? Tuition? Travel? What’s his target amount (future value)? With these objectives, how much can he invest now (present value)? With the present value, the number of years, and the future value, Juan can then compute that annual return that he needs.
Using Excel, for a one-off investment
For example, P100,000, target of P1,000,000 in 10 years
= RATE(10,,-100,000, 1,000,000)
(We have these kinds of calculators in our Money Mgt Modules #3M).
A one-off investment of P100K should yield 26% annually to achieve PHP10M in 10 years. 26% annually is not easy to achieve, mind you, unless you’re a stock market expert already.
At this point in the market, since we’re much lower than all time highs, if I had the money, I would recommend a one-off investment in index tracking funds (ETF or managed funds) and probably very select blue chip stocks.
Why an index tracking fund? Well because we know that the stock market index, in general, goes up over a long period of time despite the ups and downs it took to get there. Note that I said stock market index, I did not say every stock goes up over a long period of time. See below image of the PSE index from 2000 to 2018.
Let’s look at 10 year windows:
- Jan2000: ~2134 to Jan2010: ~3075 (+44%)
- Jan2001: ~1680 to Jan2011: ~4048 (+141%)
- Jan2002: ~1290 to Jan2012: ~4600 (+257%)
- Jan2003: ~1018 to Jan2013: ~6242 (+513%)
- Jan2004: ~1422 to Jan2014: ~6041 (+325%)
- Jan2005: ~1822 to Jan2015: ~7689 (+283%)
- Jan2006: ~2096 to Jan2016: ~6687 (+219%)
- Jan2007: ~2983 to Jan2017: ~7729 (+159%)
- Jan2008: ~3625 to Jun2018: ~7193 (+98%)
Caveat. Past performance is no guarantee of future performance. We’re just playing probabilities in the market. Note that market was quite slow from 2000 to 2009 at merely 2k levels but after the global recession, aggressively increased to 8k and 9k levels. But note as well that we reached 8k the first time in 2015, but until now, almost 3 years hence, the market is still trying to surpass that. If only I had money in 2000, I could have enjoyed above gains, but sadly I was still in high school then. 🙂
Generally, the index is primed to go up in the long run because as R.S. would say, “it is rigged”. He’s exaggerating of course. He did not say the market is controlled and prices are faked, what he means by this is that the index is changed from time to time ala survival of the fittest. Our PSE index comprises of the 30 biggest and actively traded stocks. If one falls out of market favor due to poor performance, earnings or growth, that stock shall be replaced by a better performing company eventually because that poor-performer will likely fall out of the top 30 largest and most active right? This is because we want the index to mirror the relevant companies in our economy, that’s why changing times also change the market, and thus the index. So if the index is always a collection of the best of the best, in the long run like 10 years, there is more chances of it being higher than lower.
I don’t recommend a one time big time investment in a particular stock for newbies, especially that you will leave for 10 years, unless you know what you’re doing, you can monitor it closely and you have an exit strategy in place. Look at $TEL, it used to be a market darling and bell-weather until it erased its 14 year gains (good thing there were dividends along the way). A big company can easily have challenges along the way that can make its stock prices tumble. Now the SM group is considered a bell-weather for the market but with the boom of online shopping, slowdown in properties and the threat of fintechs to banking, who can tell? They should be able to adjust fast if they want to remain as big as they are now.
I rarely do one-offs because I try to grow my investment portfolio monthly. I just try to invest an extra amount on top of the monthly during market corrections. For managed funds and ETF, I do CA whether market is up or down, my schedule is 4 times a month. I am aggressive. My horizon for this fund is 30+ years. And I am confident that it will grow.
I don’t do blind / automated CA for my personal stocks. I used too, but not anymore. Instead I trade. I don’t average down on a losing position, I buy in tranches for uptrend stocks, I cut losses. For me, Juan can do automated CA for the index, or managed funds tracking the index or probably equity or balances funds, but preferably not for individual stocks.
Some subscription services got the flack by recommending PCA. It’s not necessarily bad, but Juan must follow it closely because it has buy below parameters, stop buying parameters, and some even have sell and cut-loss parameters. Sadly, not even big groups can be right all the time, so I suggest retail investors who do PCA do so armed with the correct strategies and trading plan – cut-losses and all. In that way, soon you’re no longer doing PCA, you’re actually trading the market. Don’t follow it blindly, refine their strategy, incorporate yours.
Some people get mad if they lose money by following recommendations. Remember, your money, your rules.
Some people don’t really want to learn how to invest on their own. Their money, their rules. Still, there are informed and preferred ways to do this, rather than investing blindly or letting a broker or bank do everything.
I previously published some articles relating to this, so to supplement my answers above, please visit the following articles:
- $TEL Me Where it Hurts: When Buy and Hold Hurts Your Investments
- When is the Best Day to Buy Stocks? (Based on BDO EIP)
- Cost Averaging Through BDO Equity and EastWest PhilEquity Fund
Lastly, let me leave you with a similar article from Sir Efren Ll Cruz, RFP
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