Lessons from 10 years of peso cost averaging in the stock market

Last August marked the 10th year anniversary of COL Financial’s Easy Investment Program or EIP. It allows investors to buy a fixed value of stocks on a regular basis, be it monthly, quarterly or semiannually, over a long period of time to meet a long-term goal such as retirement. The EIP is also more commonly known as peso cost averaging or dollar cost averaging in other countries such as the United States.

Here are some of the lessons that we have learned over the course of our 10-year journey:

EIP or peso cost averaging works. Based on a portfolio with an equally weighted exposure to the 19 stocks that are part of our recommended list, an investor who religiously followed the EIP program on a monthly basis would have generated an annualized return of 11 percent. The gross return on the capital invested is also significant at 60 percent. This just means that if you had invested P5,000 monthly over the past 10 years, you would now have P960,000. This is P360,000 more than what you would have if you just kept your money in a piggy bank.

Diversification is important. Although the annualized returns of some stocks were higher than that of the portfolio (11 percent) and the PSE index (9.4 percent) since they were included in our recommended list such as SM Prime (21.8 percent), Jollibee (19.9 percent), SM (17.9 percent), Ayala Land (16 percent), Ayala Corp. (15.3 percent), and BDO (14.2 percent), there were some stocks that also underperformed the portfolio and the index. In fact, some stocks yielded negative annualized returns as these companies encountered challenges. These include Energy Development Corp. (-1.8 percent), PLDT (-4.1 percent), GT Capital (-9.9 percent) and Robinsons Land Corp. (-10.6 percent). The lesson here is that diversification is important to minimize the risk of suffering from a huge loss by unknowingly picking a losing stock for your portfolio.

Buying an ETF or an index fund is an automatic way to diversify. If you have a difficult time diversifying because you can only afford to invest a small amount of money regularly, or you really don’t know which stocks to buy, then you can just buy an exchange traded fund (ETF) or an equity index fund.

In the Philippine Stock Exchange, there is one listed ETF, which you can buy—First Metro Philippine Equity ETF or FMETF. It is a listed security that tracks the performance of the PSEi. It is also automatically diversified because the PSEi, which it aims to track, is comprised of 30 liquid large capitalized stocks.

Meanwhile, an equity index fund is also diversified because it is a mutual fund that owns a basket of stocks designed to track the performance of the PSEi. While all equity funds are diversified, the main advantage of an equity index fund over other equity funds is that it charges investors a lower management fee since the fund is not actively managed.

Both FMETF and equity index funds can be easily bought online through your online stockbroker.

Although both ETF and equity index funds are diversified and track the performance of the index, equity index funds are currently more suitable for those who have a large amount of money to invest since FMETF is still not yet very liquid unlike ETFs in other more developed markets.

Another advantage of equity index fund is that investors can buy them in increments of P1,000 after an initial purchase of P5,000. In contrast, investors who want to buy FMETF need to buy them in increments of P1,170 given the minimum board lot of 10 shares (as of this writing). Because of such structure, an investor who allocates P5,000 monthly for peso cost averaging can only deploy P4,680 when buying FMETF.

With the lessons learned from our investing journey the past 10 years, I hope that I was able to inspire you to begin and stay disciplined in your journey of regularly investing in the stock market. I also hope that I was also able to help you refine your investing strategy to manage your risk.