Money machine, as Tony Robbins calls it, is your investment that will provide you an earning to take care of you in your lifetime according to the lifestyle of your choice. Here’s one way to build your money machine:
What is Peso Cost Averaging (PCA)
Peso-cost averaging (PCA) is an investment technique of buying a fixed amount of a particular investment (Unit Investment Trust Fund for me) on a regular schedule, regardless of the price. I can buy more participations when the price are lower and fewer participations when prices are high.
The PCA technique does not guarantee that you won’t lose money on your investments. Rather, it is meant to allow small increment of investment over period of time instead of investing it at one time as a lump sum.
This strategy is a commitment to investing a fixed peso amount every month. My monthly contributions will be invested in an index fund. Each month, the fixed amount buys unit participations/shares at the then-current prices. As share prices decline, the fixed amount buys a higher number of unit participations/shares; when prices increase, the fixed amount buys fewer unit participations/shares. The real value of peso cost averaging is that I don’t have to worry about investing at the top of the market or trying to determine when to get in or out of the market.
Example of Peso Cost Average
For example, assume that I invest P10,000 on the first of each month into PNB PSEi Enhanced Index Fund. Over a period of five months, the Net Asset Value per Unit (NAVpu) of the fund on the beginning of each month was as follows:
• Month 1: P1.807
• Month 2: P1.752
• Month 3: P1.627
• Month 4: P1.618
• Month 5: P1.851
On the first of each month, by investing P5,000, I can buy a number of units/shares equal to P5,000 divided by the NAVpu price. In this example, the number of shares purchased each month is equal to:
• Month 1 units/shares = P10,000 / P1.807 = 5,534.034
• Month 2 units/shares = P10,000 / P1.752 = 5,707.762
• Month 3 units/shares = P10,000 / P1.627 = 6,146.281
• Month 4 units/shares = P10,000 / P1.618 = 6,180.470
• Month 5 units/shares = P10,000 / P1.851 = 5,402.485
Regardless of how many unit participations the P10,000 monthly investment purchased, the total number of units/shares I own is 28,971.032, and the average price paid for each participation is P1.723. Considering the current NAVpu is P1.8319, this means that my original investment of P50,000 has turned into P53,072.03.
If I invested all at once on the first month, this means the original investment of P50,000 has turned into P50,688.99, in the case that the NAVpu is P1.8319.
Peso Cost Average As a strategy
Peso Cost Average is a safe strategy to ensure an overall favorable average price per share, but not an assurance that you will not lose your investment. If you are still in accumulation phase in building your money machine just like me, peso cost average is the way to go to build your nest egg. Put your money in the market, then you let time do its work on your favor.
Just my two cents; what counts is your decision to cost average or lump sum.
Here’s to your financial success!