dangers of peso cost averaging
Blog,  Trading Basics

Dangers of Peso Cost Averaging

“SELL SHOVELS”

Peso cost averaging is a popular strategy for building investment positions over time. Ito ay paraan ng pag lalagay ng pera sa isa o iilang stock overtime. Monthly, quarterly o yearly na pagbili ng stocks with the same amount of money. This method revolves around the idea that no one can perfectly time the market. Rather than time the market, you buy in at a range of different price points.

You typically buy a stock each month or each quarter for the same amount of money regardless of the price. You buy 100 shares of stock A in March for 3 pesos. You bought the same amount of shares on April for 2 pesos. You bought the same amount of shares for 1 peso in May. You now have 300 shares with an average price of two pesos. When June comes and stock A went up to 3 pesos you already gained a lot. I made an example using months but most people who apply peso cost averaging are looking at a longer time frame ( 5 years or ten, maybe even 20)

This idea is applicable IF and its a big if. If the stock goes back up after a slump. Let me draw you an example.

Looking at the example above. If you had bought SMPH from January of 2014 until today using peso cost averaging you probably gained a lot by now.

Now take a look at the next example:

Yup. It did not look good. If you had bought TEL using peso cost averaging from January of 2014 until now, you would have lost a LOT!

This is the main reason why i shake my head every time i see some people who are happy when their stock is red for they can buy it “cheap.” Clapping your hands in excitement or wishing that your stock would go down some more so you could buy it cheap is being ignorant. Your whole approach is dependent on the fact that the stock you are buying is going to go up one day. That’s the plan right? Buy stocks every month for twenty years and retire rich? A-huh? Are you sure about that? You honestly want me to believe that there is no way your plan could come back and bite you?

Maybe you don’t see my point yet. Here, i did some calculations for you.

If you bought CHP from July 2016 until today

You would have 78,000 shares with an

average of about 5.3 pesos. (rough estimate)

Your money is supposed to be 413k (minus fees)

CHP is at 2.13 now.

your 78000 shares is just 166k(minus fees)

Your loss is about 247k (rough estimate)

I love Bro. Bo Sanchez and his TRC family. I believe that he is one of the reasons Filipinos now know the stock market. A lot of traders started off as a TRC members. I love going to the feast. I even had a few pictures with him if i remembered correctly. Don’t go and twist this blog post as a shot to TRC family or Bro Bo. To me, Bro Bo is an inspiration. He inspired a lot and he continue to do so.

Having said that, let us go back to peso cost averaging. The result of peso cost averaging is dependent on where the stock price is when you are about to liquidate your shares. If you have been buying some shares from 1 peso to 20 pesos and the stock price is at 40 when you liquidate your shares then good for you. But if you have bought the shares at 1 peso to 20 pesos and the stock price is at 2 pesos when you liquidate then you will be at loss.

STOCK PICKING is the key to peso cost average. If you picked a stock and a year or a decade from now it became an expensive stock dahil sa ganda ng takbo ng negosyo nito then thats very good. Problem with stock picking is most people who think they are good with picking stocks have a very different result if you judged them by their stock picks.

I’m not pro peso cost averaging. I’m not against it either. I’m against ignorance. If someone points out the to you the good about something, try to see also if there is a bad side to it.

I’m a fulltime trader. I help traders. I help them learn. I don’t ask for a fee. My advocacy is to help spread free learnings. I was blessed enough to meet someone a long time ago who taught me all i know about stock trading for free so now I feel obliged to pass on the knowledge for free. I have a facebook group called Trader’s Lounge and a youtube channel called Traders Lounge. You can join our facebook group. We have weekly lessons there. I also plan to put out a lot of lessons on my youtube channel. If you are interested about trading or stock market I can help you with it. I will one by one discuss different trading strategies, different chart indicators, psychology of trading, how to trade, etc.

I know a lot of people who sell peso cost averaging idea like it is a magical lamp on a desert. “Put in money every month regardless of the stock price and after 20 years you will be a millionaire”. For me i would put a big MAYBE on that statement. You know who becomes a millionaire without that big MAYBE? The person selling you the dream. I remember being asked by a friend of mine a question some years back. The question goes something like this: “If someone said they discovered a gold in your town and suggest you dig your backyard and they will buy any gold you find for twice s much as its price, what would you do?”

The answer was the first two words on this blog post.

If you want to learn more about stock trading join our Facebook Group called Trader’s Lounge

Our advocacy is sharing ideas, experiences and knowledge to traders for FREE. We offer free Technical Analysis, Fundamental Analysis and Market Psychology learning materials for free. 

We also have weekly lessons over there. We created different trading strategies like MAMA which made a lot of traders profitable. Other trading strategies include FISHBALL, PAPA, CALMA and more. We want to offer OFW’s, Employees and all Filipino people a chance to learn without paying a cent. 

We also have a Youtube Channel wherein I myself discuss strategies and trading related topics. 

Come join us. Let us push free learning. 

2 Comments

  • Clifford

    Wow! Mind-blowing. This is exactly the blog I needed to read ‘coz I had my fair share of doubts about peso cost averaging kasi hindi naman talaga natin sigurado na aangat talaga 100% yung stock na yan 10-20 years from now kahit sabihin pa natin na blue chips yan and may proven track record. Before, I just blindy did that kasi I was hyped sa sinasabi na the best time to invest is now kasi bata pa and time is your friend kasi it will maximize yung power ng compunding.. Pero alam ko sa sarili ko kay kahit ginagawa ko yun, hindi ko pa rin naman naiintindihan fully kung ano tong stock market. Ang nangyari is parang sugal lang din, which I am not a fan of. Kaya maraming salamat maam Gandakoh. I now found my way sa stock market. Ang ganda basahin ng mga blogs mo kasi very enlightening. Straight to the point at madaling intindihin.

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