The other week, I promised a friend that I will blog about how to do money cost averaging. So here it is now! If we've ever heard of the term buy low sell high, traders do this strategy with their stocks. But one can never really tell the timing of the highs and lows of stocks prices. This is the reason why it has become so risky, to the point that you could loose money.
While it is true, there is a way to invest in the stock market without losing too much. That is investing for a longer time period. You have to make sure your investment hourglass is working for you and not against you.We call it the money cost averaging strategy.
How does money cost averaging differ from trading? Well, in money cost averaging, you invest a fixed amount of money whether the prices go up and down. This is the way to make the most of your investment hourglass, no matter what age, or experience you may have about stocks.
I'm going to make an illustration. Refer to the three graphs below. Which do you think makes more profit from among them?
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| Investment A is on top left, Investment B on top right and Investment C below the two. |
Here are the formula(s):
To calculate the shares = Investment Amount
Price Per Share
Lets start with Investment A:
Let's assume that Mr. Investor invests Php 1,000 every month with his investment trending up in prices, month by month.
Month 1: 1,000/5 = 200 shares
Month 2: 1,000/12.50 = 80 shares
Month 3: 1,000/15 = 66 shares
Month 4: 1,000/20 = 50 shares
Month 5: 1,000/25 = 40 shares
Total shares: 436 shares in 5 months
If Mr. Investor will have accumulated 436 shares in five months. If he decides to sell his investments from month 1 to Month 5 with shares at valued at Php 25/share. His gross income would be Php 10,900.
How much profit did he make?
Php 10,900 - gross income from his shares
- Php 5,000 - investment amount from Month 1-5
Php 5,900 - profit from his shares!
Investment B:
Assuming that Mr. Investor invests Php 1,000 every month with his investment that doesn't fluctuate too much in prices.
Month 1: 1,000/15 = 66 shares
Month 2: 1,000/10 = 100 shares
Month 3: 1,000/18 = 55 shares
Month 4: 1,000/15 = 66 shares
Month 5: 1,000/20 = 50 shares
Total shares: 337 shares in 5 months
337 shares in five months. If he decides to sell his investments from month 1 to Month 5 with shares at valued at Php 20/share. His gross income would be Php 6,740.
For the profit;
Php 6,740 - gross income from his shares
- Php 5,000 - investment amount from Month 1-5
Php 1,740 - profit from his shares
Lets see what investment C has to offer:
Assuming that Mr. Investor invests Php 1,000 every month with his investment that doesn't fluctuate too much in prices.
Month 1: 1,000/12.50 = 80 shares
Month 2: 1,000/10 = 100 shares
Month 3: 1,000/5 = 200 shares
Month 4: 1,000/8 = 125 shares
Month 5: 1,000/20 = 40 shares
Total shares: 545 shares in 5 months
If he decides to sell his investments from month 1 to Month 5 with shares at valued at Php 25/share. His gross income would be Php 13,625.
For the profit;
Php 13,625 - gross income from his shares
- Php 5,000 - investment amount from Month 1-5
Php 8,625 - profit from his shares!
That's more than the profit gained by Investment A and B!
The reason why stock prices go up and down every day has certain factors. It could either be politics, economy,business performance of the company, and events that happens around the world.
No matter what happens to the stock prices, just buy anyway. All you have to do is just to select which company you want o invest in (make sure it's a good reputable one), and decide how much you want to invest and how often at an interval basis. The trick is to have a medium term to long term investment hourglass (5, 10, 20 years). This way, you can invest in the stock market even if you don't have all the time in the world to monitor it, and still make profit, whether the prices go up or down.
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