Question: Which is better in terms of stock investing strategy—1) trading; 2) buy and hold; or 3) do peso cost averaging (PCA)?
Answer: Firstly, let us look at actual data. For this discussion, let us consider the daily Philippine Stock Exchange index (PSEi) from the bottom of the index during COVID-19, which was hit on March 19, 2020 up to Oct. 8, 2024. It should be noted that during the period, the PSEi exhibited high volatility especially in 2020 and 2021.
Let us assume an initial investment of P100,000. Let us impute buying and selling costs (such as 0.25-percent broker’s commission, 12-percent VAT on broker’s commissions, and 0.6-percent sales transaction tax).
Now let us then define what each strategy means.
READ: Understanding the Philippine stock market
By trading, let us limit the discussion to trades where we buy first then sell later (that is, no short selling). Let us also consider trades that would have generated at least an absolute net return of 4.45 percent ( without regard for holding period). Let us consider 12 buy/sell data points during the total period under consideration.
By buy and hold, we will assume that the P100,000 is used to buy the PSEi on March 19, 2020 and sold at the Oct. 8, 2024 PSEi level, transaction costs included. We will, however, assume no transaction costs for when index component stocks would change.
Lastly, by PCA, we divide the investment of P100,000 by the said 12 buy/sell periods, book their cost at their corresponding PSEi level on the date of investment and value all trades at the Oct. 8, 2024 PSEi level. This strategy accommodates those who do not have large sums of money with which to start investing.
Based on our analysis, trading comes out the winner with a whopping 44.38-percent per year net return. Buy and hold comes in with an 11.27 percent per year net return while PCA comes in third with a weighted 10.05 percent per yer net return.
Here are some other things to also look at before any conclusions are made.
There was no consideration given to stock picking as investing will only be in the component stocks of the PSEi.
The PSEi was on an overall recovery trend during the period under consideration.
The buy/sell periods were chosen entirely from hindsight. Technical analysis may help in anticipating trends. But you will still need clairvoyance to buy and sell at ALL of the optimum points.
Trading also requires close monitoring of the stock market. If you do not have the time to monitor daily, you can easily miss out on the buying and selling opportunities.
Just like with trading, buy and hold requires that the P100,000 be available from the very start.
PCA was executed only during the 12 buy/sell data points with varying individual holding periods. This is hardly what PCA is all about. But if the P100,000 were to be divided equally among 19 quarters within the period under consideration PCA would produce a net return of 7.33 percent per year.
For the investor with a preference for ultra-high returns and risk, trading would be the best option. However, be ready with blood pressure maintenance medicines and lots of coffee to stay awake to monitor not just the Philippine market but also global markets that cause the volatility. Also, the short holding periods per trade may preclude the chance of earning cash dividends that could add to the return.
From the practical standpoint of a moneyed investor with a not too high preference for risk-taking, buy and hold would be the best strategy. There will be much less need for monitoring. The buy and hold strategy has a higher chance of reinvesting return-enhancing cash dividends than the trading strategy.
For the small investor, who more likely wants to be able to sleep well at night, buying a PSEi index pooled fund periodically would be the best since small amounts would automatically be allocated to all component index stocks, even when index components change, while cash dividends are automatically reinvested. Of course, the benefits will be marginally offset by the management fees.
What is common to all strategies is that the longer the overall period of investing, especially in an upward trending index, the more returns will be had.
So again, “its depend.” INQ
Send questions via “Ask a Friend, Ask Efren” free service at www.personalfinance.ph, SMS, Viber, Twitter, LinkedIn, WhatsApp, Instagram and Facebook. Efren Ll. Cruz is a Registered Financial Planner and Director of RFP Philippines, seasoned investment adviser, bestselling author of personal finance books in the Philippines and a YAMAN Coach.