Taking Stock of Index Investing

Global Funds

One of the easiest yet soundest strategies in stock investing is value cost averaging.  It’s a passive investment strategy where you regularly buy several stocks regardless of their intra-day trading price, under the assumption that over the long term the peaks and dips average out to a profit.

Of course, the question as always is which stocks to invest in.  It’s suicidal to assume that just any kind of stock will be profitable even in the long run.  In my case, I follow an investment plan based on stock recommendations from a reputable analyst who says what to buy and below what price to buy and at what price to sell off.

In the absence of such reliable input, the alternative is to keep to a few stocks which are generally safe investments, such as those composing the stock market index.  This strategy is called index investing.

Take for instance the Philippine stock market index consisting of the 30 stocks shown below, with the first-of-the-month prices listed over the course of the past year (note: the actual index composition has changed a few times the past year; what’s shown here is the latest composition).

index_investing_01

Say you bought each stock at the start of the month over the past year, you’d end up with the gains/losses below.

index_investing_02

Worst case scenario, you’d have ended up -6.40% poorer if you put all your money into PX.  But for everything else (except EDC), you’d have profited anywhere between 4.19% to 66.60%.  And if you invested into all the stocks, you’d have made a 26.55% average profit.

Granted, this has the benefit of hindsight, but in general long-term cost-average investing in a good market should help manage the risks of stock investing better than day-to-day trading.  After all, passive income shouldn’t have to require staring at stock quotes from the opening bell till the market close.

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>