Jun 1, 2011

[Finances] Adventures In Peso Cost Averaging

Being the geek that I am, I've wanted to make sure that I make the right financial decisions for the long term. We always go back to the cliche that we're never growing any younger and thus it becomes all the more important to plan ahead for the future.

Of course being in a third world country where corruption is rampant, the business sector is often unpredictable and government oversight is a statistical wild card, it's hard to figure out where to put your money. Quite frankly, there are people who argue in favor of just holding on to your money and keeping out of the system entirely. Plus with typical savings accounts only offering about 0.5% interest per year, simply banking your money is gong to get you anywhere. While there are special deposit products like BPI's Maxi-Saver accounts that offer better rates, it's still not enough to secure you in the long term.

Enter the scary world of the local stock market. This legalized gambling den remains to be your best bet to long term financial stability, provided you keep your wealth-building options sufficiently diverse. So apart from my bank funds, my life insurance polices and associated variable income components, I've recently started to explore the local stock market via Citisec Online.

Citisec Online Peso Cost Averaging Graphic

No, this doesn't mean I've become an active stock trader like you see in the movies. I really don't have the kind of constitution for short-term investing given how volatile the local stock market can be. Instead, I'd like to think that I'm more of a value-driven investor, mainly relying on the principle of Peso Cost Averaging (and thus the point of this entry). Let's face it, geeks like me a very skittish when it comes to high risk and high pressure situations like trying to figure out the stock market. One will always have that general advice in mind about the need to buy low and sell high, but your average guy doesn't have the time to fully analyze and theoretically understand the local market. Worse as a geek, I'd probably obsess about trying to figure out the market and would probably end up doing nothing due to analysis paralysis.

But Peso Cost Averaging makes sense to me, and maybe it'll work for you as well. Let's face it, if you're not a regular reader of this blog, then some investment-related web search brought you here. Given that, I hope this proves helpful to all of you on one level or another.

Cost Averaging when it comes to stocks simply means that you invest a set amount of money on a regular basis in certain stocks and reap the gains in the long term - think 10-20 years of this kind of investing. This works since whether you buy the stocks at a higher or lower amount, the net result is that the average value of your stock portfolio will be on the rise over the years.

For this to work though, it assumes that you've invested in high value or so-called blue chip stocks from reputable companies that are almost guaranteed to continually return rising profits over the period of your investment. As these companies grow, so will your investment and thus everyone's happy. Figuring out which stocks to invest in can be tricky - some like to look at the price of the stock versus the actual earnings generated by the company. Citisec Online provides a list of recommended growth stocks that include our strongest banks, certain utilities and other high profile companies that we've come to respect in the business world. The list makes sense to me on a common sense level and so I've started to put money into the pot along similar lines.

Now this is not for the weak of heart or those with major control issues. Since this is a long-term investing strategy, it means that you'll have to deal with seeing the short term volatility of the market as the value of your stocks will go up and down at the drop of a hat. Thus you'll need either a strong stomach or the discipline to NOT check the value of your stocks every day. If anything, just keep to date on the companies that you've decided to work with to make sure they haven't been brainwashed by aliens or had epiphanies requiring that they donate all their assets to charity.

Also, keep a tight portfolio. I've done my fair share of experimentation and now I'm stuck with a few stocks that I can't dump until they go back to a level where I can at least break even in the sale. Some would say that 2-3 stocks is more than enough while others state that your upper limit is 5. That generally makes sense to me, especially for your average investor just wanting to build a nest egg for the future.

What's so great about all this then? Why go to through all this stress? In the long run, it means that your money will grow as the companies do and their rate of growth will be a heck of a lot more than the 0.5% you're getting from your savings account. Heck, it'll be even better than the 3.5% you're getting in your slow-growing time deposits. While it's true that you could make EVEN MORE money by actively trading, not everyone is built for that sort of thing. Thus instead here's a strategy for long term and steady growth that will be a pretty big deal in the future when you're thinking about quitting your job and running a golden retriever plantation.

So let's all embark on this investment adventure together! The math is pretty sound and the long-term results promise to be pretty good indeed.
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