Power Of Cost Averaging
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I started investing in stocks in July of 2007. At that time, the Philippine Stock Exchange index (PSEi) was trading at all time highs. 16 months later and a global economic crisis at hand, the PSEi shrunk by almost 50%. And so did my stock investments. But instead of selling my stocks at a loss, I held on to them. And now that I got some investible cash, I intend to cost average my stock positions to realize better gains once the stock market rebounds. So, to answer my own question a couple of months ago, I should take advantage of the bargain prices of stocks right now.
Let me explain why. Let’s take RLC for example. I bought 100 shares of RLC last November 2007. At date of purchase, RLC was at Php18.50. It never got up afterwards. But I held on to it, because I didn’t need the money at that time.
Enter February 2009, with better cash flow, I thought of adding into my stock positions. Since RLC was the one with the biggest paper loss, I decided to buy 1,000 shares at Php4.75. Making that purchase brought down RLC’s average cost to just Php6.06. I don’t have to wait for it to go back to Php18.50 anymore. Imagine if it did. That would mean a whopping 188% gain. That’s the power of cost averaging.
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2 Comments on this post
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harley said:
sir isn’t it that peso cost averaging should be done on a regular basis? you should be buying shares at a fixed amount regardless of the market price. I believe what you’ve done is the concept of averaging down.
February 27th, 2009 at 11:26 am -
SoNn said:
I googled and you’re actually right. Thanks for the correction. All this time I thought they were the same thing.
February 27th, 2009 at 9:37 pm
