Peso Cost Averaging or Lump Sum Investing?

For previous post about peso cost averaging, please refer to the following links:
Cost Averaging in First Metro Save and Learn Equity Fund
Peso Cost Averaging in Philequity Fund
Image Source: ElderlyJournal.com

Many people are asking which investing strategy is the better option between peso cost averaging (PCA) or lump sum (LS). Let us first define what is PCA and LS.

PCA- peso cost averaging is investing a fixed small amount at a regular interval or frequency. For example, investing P5,000 per month or per quarter in UITF or mutual fund.

LS - lump sum investment is investing a big amount, one time at the start of the investment period. For example, investing P200,000 in 2001 then hold until 2010.

As per definition above, let us see the result of the Philippine Equity Mutual Fund performance, assuming we used the 2 strategies, for the last 10 and 5 years.



As you can see in the table above, both for 5 and 10 years, lump sum investment is the clear winner in investing. This only proves that long term investing, meaning holding the investment for a long period of time, will give a better result than timing the market.



However, before we jump into conclusion that peso cost averaging in mutual fund is mediocre compared to lump sum investing, let us take the case of the most recent crisis period.
1. In July 2007, the Philippine Stock Market is at its peak before the 2008 Financial Meltdown.
2. In Sep 2008, the start of 2008 Financial Crisis after Lehman Brothers, a global financial firm in the US, files for bankruptcy.

With the above event, let us assume we invest using PCA and LS in Philippine Equity Mutual Fund starting July 2007 up to July 2009. Below is the result:



One of the disadvantage of investing in stocks and mutual fund particularly equity or growth mutual fund volatility and its price can dive (loss) during bear period specially during crisis. As shown above, both PCA and LS resulted to book losses during the financial crisis period. However, between PCA and LS, PCA will give you less chance of heart attack than LS since the losses in PCA are less than the one in LS. This is one of the clear advantage of peso cost averaging - more peace of mind during rough times.

However, take note that above losses is only book losses and temporary. If you invest in the peak of 2007 and didn't panic during the stock market crash in 2008 and if you keep your holdings up to this period, chances are you have not only break even but also gained from your investments.

In case you want to check how did I arrived with the figures in the above 2 tables, below is the spreadsheet of all the equity mutual fund cases:
Click the tab to select the sheets.  Point to the "> and <" in the right to drag to other sheets

As a conclusion, Lump Sum Investing is a good strategy in the long term while Peso Cost Averaging is a good strategy for those who doesn't have enough money for lump sum and are less risky than LS. If you are still confuse between the 2, just invest your money now and hold it for a long time. Because one thing is for sure, both PCA and LS are better than procrastinating or delaying your investment. After all, time is gold. 

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