I was talking to a colleague last week telling me that he just lost in mutual funds by P15,000.00. Surprised with what I heard, I began to ask some questions related to his portfolio. From the question and answer portion we had, I got the following. He said that he invested in mutual funds in 2007. He was influenced by his co-workers who have the same investments that’s why he got in.
However, when the news about the financial crisis in the US broke out, they began to fear loosing their money. Day by day, they monitor their fund. And the more they monitor, the more ‘fear’ consumed them. Until they all agreed to withdraw (redeem) their funds.
After learning his story, I asked him. Why did you invest in the first place? He answers, for retirement. I then replied, for retirement but you redeemed in less than a year? And more than that, you redeemed when the market (NAVPS – net asset value per share) is down? He said they were afraid it will never recover. So that is why. They acted based on fear and not on logic.
It could have been different if they had known Cost Averaging. So what’s Cost Averaging?
Cost Averaging (Peso or Dollar) is a widely used discipline which simply means, making investment purchases on a regular basis. This serves to average your share cost over time. Buying these shares on a regular basis with a fixed amount of money, will mean that you will automatically buy more units or share when the price is low, and fewer units when the price is high.
Let’s take a look at the illustration below to understand this principle. These are actual values of NAVPS of one mutual fund company I took from Investment Company Association of the Philippines website. (www.icap.com.ph).
Say, I entered in this company in 2004 with P10,000.00. Applying the cost averaging principle, I will then need to make P10,000.00 deposit every quarter for 5 years. This will be my investments (see below)
In 5 years, I would have deposited a total of P200,000.00. Computing the number of shares that I have accumulated (this can be obtained by P10,000.00 by the NAVPS), I would have 145,907.0352 shares. If in case I have decided to redeem all of it by the last NAVPS (145,907.0352 x 1.6566), my total fund will be equal to Php241,709.59. So in 5 years, I would have earned a total of Php41,709.59 or equivalent to 60% 20.85% earnings.
Let’s compare that if you have deposited your money in the bank (time deposit earning 3.75% per annum w/ 20% with holding tax on the interest). The total interest that you could have earned will be Php7,500.00 minus 20% tax, that’s Php6,000.00 in 5 years time.
This is exactly the same principles used by insurance companies that’s why they were able to give dividends and earnings for our insurance or retirement fund.
Interesting eh. Contact your agents/broker and start investing now. Be it in Variable Universal Life or Mutual Funds, investing when the market is low will just us the best potential to earn more over time.