MONEY MATH Invest Lump Sum or Frequently?
EASY MONEY>MONEY MATH
Invest Lump Sum or Frequently?
Three managers working at a real estate company decided to invest in the stock market. All of them had P120,000 to invest, but they disagree on how often and when they should buy shares of stock. Juan wanted to invest the lump sum at the beginning of the year. Manny would rather spread his investments equally every month while Troy plans to invest P30,000 every quarter.
In the course of the year, Juan bought stocks of Company ABC (which was quite volatile due to merger rumors) during the first trading day in January. Manny invested also in the same stock at the same time, but only P10,000 and then placed the same amount on the first day of each succeeding month thereafter. Troy invested P30,000 in the same stock the same day in January and P30,000 each on the first trading day of April, July, and October.
The stock prices of Company of ABC during the first trading day of each month were as follows: P120 (Jan), P105 (Feb), P95 (Mar), P120 (Apr), P70 (May), P75 (June), P100 (July), P90 (Aug), P95 (Sep), P115 (Oct), P130 (Nov), and P150 (Dec).
Then they all decided to sell all their shares the following month when the stock price was at P175. Which among the three made the most money (ignoring taxes, commissions, board lots, and other factors)?
- Juan
- Manny
- Troy
Answer: Manny
Juan bought 1,000 shares of Company ABC at P120. When he sells at P175, he nets P55,000 from his investment. Troy’s P30,000 every quarter buys him different number of shares – 250 in January, 250 again in April, 300 in July, and 261 in October. All told, he was able to accumulate 1,061 shares, which he sold for P185,652 for a profit of P65,652. In other words, he was able to buy more shares particularly in July and October when the stock prices were low.
But Manny made the most money. His P10,000 a month allowed him to buy more shares as he captured more lower prices throughout the year (especially in March, May, June, August, and September, which Troy failed to capture), or a total of 1,190 shares. Selling everything for P208,299, he nets a cool P88,299, or 61% more than Juan and 34% more than Troy. That’s the advantage of frequent investing at smaller amounts, or what is known as peso cost averaging.
But this is true only because Juan bought the shares when they were at 120. If he would have bought them when the price was lower say 100 or 90. He would be 20% richer than Manny right?
the problem is he already miss the opportunity of buying the stock at the lower price coz he invest his money at one time when price of the stock is higher.
I think everyone (Juan Manny Troy) did not have the correct mindset on why they invested in the first place.
Investing your money in equities/ very volatile instruments such as pure stocks, requires us to be invested at least 10 years or more in order to achieve optimal capital growth.
In my opinion, since the three redeemed their cash on the very first year, it is not safe to say that Manny’s method will outperform Juan’s and Troy’s in the long run. (especially if invested for 10 years).
I believe Juan will emerge as the winner, especially if invested for 20 years.
Just my opinion though.