Make Volatility Work on Your FavorMarch 31, 2017
by Erwin Baluyot
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 characteristic 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 decisions. And without the proper knowledge and control, the margin of error for this kind of investor escalates –he is most likely to lose more 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.
The perks of regular investing
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 starts 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 ₱12, 000 at the start of the year, and plan to put it in an equity fund. John put his money as lump sum investment (₱12,000) at the start of the year, while Peter decided to invest his money in equal parts as regular, monthly investment (₱1,000 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.
This practice also hits the psychological side of an investor. For he will not worry 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 a financial base over time 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 investors 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.
This article also appeared on the Rampver Financials’ official Medium Publication, Rampver Reads.