The inherent volatility of the stock
market implies that an investor will attempt to actively manage his investment
by timing the market” – waits for the market to fall before he invests, and
when it climbs a certain point, he sells his shares, and thus he pockets
short-term profits. Though this is a characteristics and familiar stock trader
move, this kind of behavior can be a disadvantage for starters who do not have
the adequate knowledge and expertise. “Timing the Market”could involve a wide
range of sentiments and drama, and these can loom the investor’s
decision-making process, for he thinks of the short-term effects instead of
long-term decision, and without the proper knowledge and control, the margin of
error for this kind of investor escalates – he is most likely to lose money in
the process than gain a profit.
In reality, volatility can be your
friend provided you make regular investments timed on certain time frames in a
year. This strategy is called “Peso-Cost Averaging”, and why do we say that
works? The market has been always difficult to predict, even for seasoned
investors. Investing regularly is one of the proven and tested ways to smooth
the rough road of volatility.
Regular monthly investing gives an
investor, especially starters, the benefit of peace of mind because rather than
putting a big lump sum investment then panic as the market start to drop, the
investor will almost be glad for he can buy more shares the next month. If the
market does climb, the investor will be glad also, for he still made profit
from his previous investment. It’s a hassle-free win-win situation.
To further illustrate, let’s take a
look at this scenario: Both John and Peter have P12,000 at the start of the
year, and plan to put it in an equity fund. John put his money as lump sum
investment (P12,000) at the start of the year, while Peter decided to invest
his money in equal parts as regular, monthly investment (P1,000 per month) for
the whole year.
As the table shows, Peter who decided
to spread his money into regular, monthly investment has bought more shares
than John who invested his money as lump sum at the start of the year. They
both invested the same amount of money but the market volatility that affected
John’s money for the entire year is the same volatility that made Peter acquire
more shares on the run. Sounds interesting, right?
The investor then will not plan about
when to buy or sell shares, and the only decision he will make the next year is
whether to increase the amount of investment per month.
The practice also hits the
psychological side of an investor. For he will not weary much what happens in
the market, and invests at regular intervals, he now develops the precious
habit of investing. The discipline of regular investing helps an investor buy
more shares and build up financial base overtime and encourages him to buy even
when the market is down. Especially for starters, monthly investing is
particularly useful as a means of monitoring investments and developing the
discipline of putting money away on a regular basis.
It will also benefit those who do not
have rather large amount of funds to invest one time.
Again, as the adage goes, as an
investor, it is not “timing the market”, but “the time in the market” that’s
more important.
-Rampver Financials
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