For beginners and passive investors, the cost averaging strategy – locally known as peso-cost averaging (PCA) – is an investing method that can be very useful.
With this approach, you’ll invest on a regular basis so there’s no need to wait for the perfect time to buy. Done right, it can help you manage risks in the long run.
Keep reading to learn what this technique means and how to apply it.
How does peso-cost averaging work?
PCA is a strategy that involves investing a fixed amount of money at a regular schedule over a medium or long term. You’ll keep investing regardless of the asset's price and market conditions.
Here’s how it works: You decide to invest a fixed amount or a certain percentage of your income every month, say P1,000, into a product like a pooled fund.
During a month when the price is low, your P1,000 will buy you more units. When the price is high, you’ll get fewer units with the same amount.
Over time, this strategy helps average out the cost of your investments, lowering the overall price per unit and minimizing the impact of short-lived price changes.
This approach is ideal for beginners who want to start investing without worrying about getting their timing right. It can also allow you to begin with small amounts and build the habit of investing regularly.
The opposite of this method is lump-sum investing. Using the example above, investing a lump sum means you’ll put P12,000 in an asset all at once for that year instead of spreading out your money.
A lump-sum investment may offer higher returns than PCA if you buy at the right time. However, PCA may be a suitable alternative if you don’t want to worry about market timing or don’t have a lump sum to invest yet.
How can you do peso-cost averaging?
If you’ve determined that PCA is a good method for you, learn how to apply it through the following steps.
1. Choose your investment
Most people associate PCA with buying stocks. However, this method also works for other investment products whose value can change a lot over a period of time, like Unit Investment Trust Funds (UITFs) or mutual funds.
You can consider such products while keeping your money goals and risk tolerance in mind. If you have yet to start investing, you should know the things to prepare before you begin.
See our checklist in this article.
2. Set an amount
Decide how much money you want to invest regularly. You can start with an amount that fits your budget and the minimum requirement, then increase it as your financial situation improves.
3. Determine your investment schedule
Set a regular investment schedule that you can easily commit to. You may choose to add money quarterly, monthly, or better yet – every payday.
4. Automate your investments
There are platforms and products that can allow you to set up automatic investments. Your money will be taken out of your settlement account on your chosen schedule so there’s no chance of forgetting to add money.
5. Stay consistent but review your PCA at least once a year
Lastly, keep sticking to your strategy and schedule until it’s time to get your money out or there’s a valid reason to pull out of your investment.
It’s also best to revisit your PCA every year to factor in salary increases. This allows you to invest more as you earn more while keeping lifestyle inflation in check.
You can use this technique to invest in multiple products to diversify your portfolio. If you’re confident in your skills and prospects (and you can budget enough), you can also do lump-sum investing at the same time.
