Welcome to the third and final part of this series.
Hopefully by now, you already know how to do cost averaging and likewise understand how cost averaging works from a mathematical point of view.
As promised, in this last part – we shall examine actual Philippine stocks and see how your investment would have performed if you did cost averaging on them.
From the previous post, you can see that cost averaging is favorable if the trend is sideways and/or upwards.
This is the key when choosing the best stocks for cost averaging.
In reality, stock prices go up and down – but if you look at their long term performance, you’ll see that some companies would fit this criteria. Examples are Jollibee (JFC) and Ayala Land, Inc (ALI).
The blue line (JFC) has an upward trend for the past five years while the brown line (ALI) has been moving on a sideways direction.
In general, blue chip companies are the best stocks to buy for cost averaging – because they have a national reputation for quality, reliability and the ability to operate profitably in good times and bad. Short to say, they are the leaders in their industry. (Blue Chip – Wikipedia)
So while it’s true that the past trend of a stock DOES NOT indicate it’s future performance, blue chip companies have strong fundamentals that makes them less likely to go bankrupt in the foreseeable future.
Again, there’s no guarantee, but personally, I’d rather buy shares from well-known and stable companies that have experienced financial growth in the past than “unknown” and “unproven” public companies. Do you agree?
Now assuming you invested at most P5,000 each to JFC and ALI every quarter from January 2008 until October 2010 and sold all your stocks last January 2011. How much would you have gained? The tables show the results below.
Ayala Land, Inc. (ALI)
As you can see, for JFC, your money has grown by around 73% from January 2008 to January 2011 (giving you a profit of P41,750) while for ALI, your investment has grown by at least 64% (with a gain of P33,810).
Combined, your total cash of P109,715 which you invested little by little in the past three years is now worth a total of P185,275. Invest that same amount in a time deposit account and you’ll be nowhere near that amount after three years!
IMPORTANT: Major assumptions in the calculations above:
- Stock prices were based on the range of closing prices during the first week of the indicated month
- A board lot of 10 was used for the stock price of JFC – a PSE rule that got implemented only last July 2010
- As a rule, you can only buy stocks in multiples of the board lot.
- If the old rule was applied, the board lot of JFC would have been 100 before July 2010 – making an investment of P5,000 impossible because you’ll need more than that to buy the minimum required number of JFC stocks
- Transaction fees, taxes and other costs when buying and selling stocks have been ignored
- Likewise, income received from dividends have also been ignored
There are other minor assumptions made in the examples above. However, what’s important for you to see now is how cost averaging was applied to JFC and ALI with profitable results in the end.
Also, note that since you’re “allowable budget” per company per quarter is only P5,000 – then you should NOT spend more than that every period to stay within the general principles of cost averaging.
- Cost averaging is an investment strategy that allows you to passively invest without having to worry about “timing the market” and closely monitoring your investments.
- In the stock market, it is recommended that you apply cost averaging on companies which have shown stable growth and performance over the past years to minimize your risks.
- There are no guarantees in the stock market, but with blue chip stocks in general, the longer you invest – the higher your potential profit would be. Again, always keep in mind, there are no guarantees.
Lastly, before you invest, be sure to have ALL THREE of these requirements: an emergency fund, an investment objective and a thorough understanding of what you’re investing on.
I hope you found this series truly informative and educational.
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Easy Series Reference:
- How To Do Cost Averaging: Passive Stock Market Investing Part 1
- How Does Cost Averaging Work: Passive Stock Market Investing Part 2
- How To Pick The Right Stocks For Cost Averaging: Passive Stock Market Investing Part 3
FREE DOWNLOAD: Cost Averaging Template in MS Excel
Disclaimer: The information above should not be taken as financial advise from an expert. This article is merely for educational purposes. Please consult a wealth manager or a certified financial planner before making any major investment decision.
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