Question: Some say that the best time to invest is today. Does this mean that I should immediately invest all of what I have? Because others say that the best strategy for investing is to do it periodically. – asked at “Ask a friend, ask Efren” free service available at www.personalfinance.ph and Facebook.
Answer: The great equation in time value of money, and perhaps even in life, states that the future value of your wealth will be determined by the amount you invest now (present value) multiplied by the sum of 1 and the percentage rate of return, which sum is raised to the number of periods of investment.
In terms of formula, FV = PV x (1 + r)n, where:
FV = future value
PV = present value
r = rate of investment return (typically per annum)
n = number of periods of investment (typically in years)
So for people who invest in one large lump sum now will theoretically have the maximum return if they were to earn the assumed investment return over the period in consideration. But many do not have that one large lump sum to invest in one go. At the same time, with volatility being the new normal, the assumed investment return may just be the equivalent over the period in consideration. In other words, there may be times when returns would be low and even negative.
To overcome the lack of a large sum for one-time investing and the volatility in the markets, experts including no less than Warren Buffett, the world’s richest investor, say that the best alternative is to make investments over time. Some even say that the better alternative for people who do not really have a large amount to invest in one go is to do so periodically with a fixed amount or what is known in the Philippines as Peso Cost Averaging (PCA).
But there is a peculiar advice on investing in pooled funds. Pooled funds in the Philippines are mutual funds, unit investment trust funds (UITFs) and variable unit-linked insurance policies (VULs, particularly the single pay type). The advice is to invest only in the mornings of Monday, Tuesday, Wednesday, and Thursday. Why? This is because of the practice of pooled funds to value their net assets via forward pricing.
Forward pricing is the practice of computing the price of a pooled fund after the close of trading hours. In the Philippines, the price of pooled funds as measured by net asset value (or NAVPS for mutual funds) or net asset value per unit (NAVPU for UITFs and VULs) is computed at past 3 p.m. when the last of the capital markets closes. Under forward pricing, the pooled fund investor buys or sells as close as possible to the real-time price. Buying at the NAVPS or NAVPU of the previous day will not capture the earnings or for that matter the losses for the current day.
Now here is where the complication arises. Pooled funds have a cut-off time for accepting purchases and requests for redemptions. This cut-off time is 12 noon. So here is what happens.
When an investor buys into a pooled fund in the morning of a Monday, even if his investment can already contribute to the earnings for the day, his investment is applied to the price computed at the end of Monday. His investment, therefore, starts to earn only from the following Tuesday. If the investor places his funds on a Tuesday afternoon, because he placed his money already past the 12 noon cut-off time, his investment gets booked in the morning of the following Wednesday and priced in the afternoon of the same Wednesday. Thus, his money starts to earn only by Thursday.
If an investor buys on a Thursday afternoon, his investment gets booked only on the following Friday morning, priced in the afternoon of the same Friday and starts to earn only by the following Monday. The same delay in earning will be faced by investors who place their money on a Friday morning.
Finally, an investor who invests on a Friday afternoon will start to earn only on the following Tuesday. The impact of the delay in earning is particularly felt for equity funds, which have very little recurring interest income.
So the best strategy for investing, particularly for people who do not have that large lump sum to invest in one go is to do PCA but timed preferably in the mornings of Monday, Tuesday, Wednesday and Thursday (to minimize the delay in earning).
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(Efren Ll. Cruz is a Registered Financial Planner of RFP Philippines, personal finance coach, seasoned investment adviser and bestselling author. Questions about the article may be sent by SMS to 0917-505-0709 or emailed to efren@personalfinance.ph. To learn more about value investing strategies, 54th Registered Financial Planner (RFP) program this May 28 to July 16, 2016. To inquire, e-mail info@rfp.ph or text <name><e-mail> <RFP> at 0917-9689774.)