The myth
Put simply, peso-cost averaging means that you put aside a fixed amount of money at regular intervals for investing. By doing this, you are likely to face less risk versus putting all your money in at one time, and at the same time, can end up investing affordably as you need relatively small amounts at a time.
This concept is usually applied in stock market investing, which is why some people believe that peso-cost averaging is only for stocks.
Why do people believe it?
Because doing peso-cost averaging will lead you to invest throughout the market cycle, you hope to balance out the times prices are high (so you get less shares) with the times that prices are low (giving you more shares).
This means that you face less risk than a lump-sum investment, where there is a chance that you will be buying when prices are high and ultimately giving you less shares than if you did peso-cost averaging. This concept has been effective for many people in the past, which is why it remains a popular investing strategy today.
Of course, peso-cost investing does have potential drawbacks. Compared to one-time investing when the price is low, the returns you get through peso-cost investing can be less. Sticking to a regular investing schedule may also keep you from reacting quickly to opportunities.
Risks of believing this myth
Peso-cost averaging has a lot of potential for stock market investing. But if you only practice this concept for the company shares that you buy, you may miss out on its benefits for other types of investments.
Take a Unit Investment Trust Fund (UITF), for example. Because the fund’s Net Asset Value Per Unit (NAVPU) can change daily, the number of units that fit your money can change with it.
If you invest all your money in a UITF at one time, you might do it when the NAVPU is high, and so you would get less units. Peso-cost averaging would give you a chance to lessen the risk of this happening.
Peso-cost averaging works best with products whose value can have large changes over a relatively short time. Investing in bonds and certificates of deposit, for example, probably wouldn’t benefit from this concept.
Verdict: False.
While peso-cost averaging has a lot of potential for stock investing, it could also work for other products whose value moves up and down.
Just keep in mind that it may limit the amount of profit your investment might earn, as compared to a lump-sum investment done at the right time – but it saves you the stress of trading, and builds in you the discipline of slow, steady, long-term investing.
Also, the success of peso-cost averaging requires products whose value will grow in the future. That’s why finding the right investments is essential to making this strategy work.
