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Introduction to Cost Averaging
Category: Intermediate Posted on: August 15, 2012 by: [email protected] Comments: 0 Attachments: 0

Building Your Personal Wealth with 3 Simple Steps

By COL Financial (www.colfinancial.com)

Every Filipino has a dream to achieve financial success. While most strive to have just enough cash in the bank, a few seek to find opportunities to build their personal wealth and multiply it from hundreds to thousands and hopefully millions.

Reaching that dream only requires a small portion of your savings, good discipline, and time.  History has shown that investing in good quality companies in the stock market is the best way to make your money work harder for you. Investing regularly in good quality assets over time is the most efficient way to grow your wealth and achieve your goals.

There is an easy three-part recipe for financial success -– start  saving, invest regularly and continuously but most importantly, adopt that discipline as early as now.

STEP 1: Pay yourself first.

Start saving and setting aside some money for your future.  Every time you receive your income (salary or profits from business), immediately set aside a portion for yourself for savings before spending on anything. Remember this magic formula:
Income - Savings = Expenses.

This will ensure that you will always have ample savings to set aside for your investments.

STEP 2: Invest and do so regularly.

Your savings can work harder for you by allowing it to grow over time in different investment instruments. Find investments that compound their value over time to augment the ability for your capital to grow faster. The stock market is one type of investment that can compound your money. Historically, stocks have offered returns of an average of 10% to 12% yearly if maintained for the long-term regardless of economic conditions and market environments.

For example, if you invested Php10,000 and your stock appreciated by 10% at the end of each year, your stock is now priced at Php11,000 at the end of the first year. If you hold onto your stock investment and it continues to appreciate at 10%, at the second year, your stock would appreciate to Php12,100. If you stay with it, you'd more than double your money every eight years.

The real power of investing will show when compounding is accompanied by regular investing. The process of continuously purchasing stock shares at a fixed amount and in regular intervals is called peso cost averaging. You end up buying more shares when prices are low and less shares when prices are high, bringing down your average cost over time.

Let’s say you invest Php10,000 monthly to buy shares of a stock.   On your first purchase at Php50 per share, you get to buy 200 shares. If on the next month the stock moves up to Php62.50, your Php10,000 allows you to buy only 160 shares. On the following month, if the stock drops to Php40.00, you will be able to buy 250 shares with the same amount of cash.  This gives you an average price of Php49.18.  Thus you’re accumulating more shares at cheaper prices and over time, as the company grows, expands and appreciates in value, your investment will do the same. It is important to stress that cost averaging only works when you invest in only good quality companies, ideally those that you’re familiar with which maintain a good historical track record and are managed by professionals with industry expertise.

STEP 3: Start now.

When investing in the stock market, time is your most precious asset.  The earlier you start, the more time you have to make your money grow.

The examples below show two friends with different saving and investing habits. Marie, who started at 20 years old, invested Php60,000 a year for just 10 years while Joseph started later at 40 years old but with a larger amount of Php300,000 a year for 25 years.  At the age of 65, Marie still comes out substantially ahead with a greater amount of Php69.7 million as compared to Joseph’s Php50.5 million.  This shows that the earlier you start investing, the less amount you need to save while still getting a higher value by the time you retire.

So think about investing as early as now and earn abundantly more for your future by taking the necessary steps to building your wealth today. It only takes three.



COL Financial (COL), formerly known as CitisecOnline, is the no. 1 online stockbroker in the Philippine Stock Exchange with a strong capitalization of over Php1 Billion. With years of experience, expertise and local and global knowledge of equities combined with an advanced trading platform, COL provides a convenient way of successfully investing in stocks. COL holds free weekly investor education seminars on the basics of investing in the stock market at the COL Training Center, 24/F East Tower, PSE Centre, Exchange Rd. Ortigas Center Pasig City. For more information, you can visit our website at www.colfinancial.com or call 6-515-888.

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Level : Intermediate

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Cost Averaging

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