Last Updated on July 29, 2022
TL;DR – Peso-cost averaging (PCA) is a simple way to start investing in the stock market, but oftentimes, it is not the best way. The biggest disadvantage of using PCA is the lost opportunities while waiting for a stock to rise again.
*** If you still don’t know what the stock market is, you may refer to my previous post.
If you’re new to stock investing, then you may probably have heard about the investment strategy of peso-cost averaging.
It is a long-term stock investing strategy. The investor will consistently put in money every month to buy a stock regardless of its price.
This strategy aims to ride the ups and downs of the market by spreading the risks over time, and hopefully, by the time you withdraw your funds, it gained a significant amount.
While this is a good start to invest, especially if you have a busy schedule, the bad news is you may be missing out on other opportunities in the stock market.
From Peso-Cost Averaging to Trading
When I first discovered the stock market, I was mainly a long-term investor. I believed that stock trading is like gambling.
I stuck to my long-term investment strategy for most of my investing years. I just put in money every month and ride the market’s ups and downs.
I was hoping that one day when I retire, it will have multiplied several folds to sustain my lifestyle, just like the typical Jollibee (JFC) and PLDT (TEL) examples, which multiplied several folds in the past 20 years.
Long-term investing is also what is often advised. Though it is a goal-based approach, there is still added risk to it, which is not often discussed.
I realized that the stock market offers many opportunities if only investors combine fundamentals with technical analysis, market sentiments, and risk management.
So, what changed?
When I started directly investing in stocks, it was the tail-end of a bull run — the market condition when stocks are just going up and up.
Soon, the market hit its all-time high and started declining ever since.
Fast forward to 2020. The pandemic hit the Philippine stock market hard and started crashing, losing my capital in a paper loss.
After a few months and the market started rallying, I decided to sell all my positions regardless of their price and have a fresh start in trading.
I then recovered my losses and started to earn. From my experience, here are some of the downsides of peso-cost averaging.
1. Your stock may take a longer time before it breaks even.
Here’s a scenario of two investors buying Jollibee (JFC) stock every month.
Investor 1 started buying at the peak of JFC in 2019. He began accumulating stocks from the highs of P330/share and continuously bought shares every month.
On the other hand, Investor 2 only started buying JFC stocks during the 2020 Pandemic Market Crash at P100 per share.
Investor 1 plans to continuously buy and hold JFC until he retires, while Investor 2 plans to sell his shares once it reaches his target price near the immediate resistance of P200.00/share or higher.
While Investor 1 is still continuously averaging down just to break even, Investor 2 has doubled his investment amount in less time.
After selling, Investor 2 will buy another stock from his stocks watchlist and repeat buying oversold stocks.
From this example, though Investor 1 started buying stocks earlier than Investor 2, he will take a long time before breaking even. While Investor 2 already cashed in his gains.
This scenario quickly shows the advantage of knowing basic market timing strategies.
2. You are missing other potential trades.
Going back to the previous example, Investor 1 continuously bought a downtrend stock, while Investor 2 waits for the opportunity to buy a stock.
Due to his continuous buying strategy regardless of price, will take some time before his investment gains again.
Investor 2 does not buy relatively expensive stocks. Instead, he accumulates his buying power to buy stocks that have higher growth potential.
Investor 2 is leveraging on the market condition to decide when to buy and when not to.
Standard advice in stock trading is to never add to a losing position or simply never average down — which is the total opposite of peso-cost averaging.
Instead of averaging down your stock price, you may want to try and buy other stocks with more growth potential.
3. There is no assurance that the stocks you hold now will still gain in the future.
Based on the Product Life Cycle Stage, every product will mature and come to an end, just like Nokia, Friendster, and Blockbuster, which is also applicable to companies.
I know that we often use blue-chip stocks to show the advantage of time in the stock market, but it is seldom discussed that those blue-chip stocks were also once growth stocks.
If we go back in time and take a look at the PLDT share price back in 2014, it was at an all-time high at P3,300+/share.
But now, it is just barely ranging from below P1,000 to P1,500.
Though it is possible for PLDT to return to its all-time high, you will suffer the opportunity cost for not shifting to a better-performing stock.
Your trading psychology may also be battered due to a long time of holding a losing position.
I have a demanding job, so I don’t have time to monitor the market. What should I do?
1. You may try position trading.
Position trading is one way to maximize stock potential even if you’re busy with your day job. You just need to buy when certain market conditions are met. If not, just save your money until you can start buying again.
2. If you’re using COL or other brokers, you may want to consider their recommendations.
COL and other stock brokerage firms usually release a list of stock recommendations. If you don’t have the time to analyze the stock market, you may want to try it.
3. You may buy dividend stocks.
Instead of buying stocks for capital appreciation, you may want to choose dividend stocks instead. Dividends are payouts by companies to their shareholders in the form of cash or stocks.
You may also check the PSE Edge Portal here.
The stock market is a great equalizer.
Though this post may suggest that I am against Peso-Cost Averaging by giving a few of its disadvantages, what I am trying to present is how to maximize the stock market’s potential.
I hope that we can benefit more from the stock market.
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