BPI Regular Subscription Plan

If you've been reading this blog or other resources about personal finance you're probably familiar with cost averaging.  If not, you can read my initial post about it here and another post with a detailed example here.

One of the challenges of cost-averaging is finding the time and effort to do it regularly.  (It's a bit like blogging that way.)  Fortunately several banks and financial institutions have introduced mechanisms to make cost-averaging easier.

One of these is BPI's Regular Subscription Plan.  It's a program that allows investors to set an amount and frequency for periodic investments.  Of course this assumes that 1) you have a BPI bank account and 2) you've already invested in at least one of their funds.

Basically, you tell BPI how much and how often you want to invest and the fund you want to invest in then 'forget' about it.  The amount should meet the minimum required, which varies from fund to fund.  The frequency may be monthly or quarterly.  You also specify when the plan should start and end.  For example, you can set your plan to invest P2500 quarterly in their Short-Term fund from June 12, 2014 to June 12, 2024.

You can enroll in a Regular Subscription Plan through BPI branches or online on http://www.bpiexpressonline.com/.   If you invest or plan to invest in BPI's funds I think this is a great way to do cost-averaging.  You can learn more by reading the offical FAQs.

Real World Cost Averaging Example

Here's a cost-averaging example taken from my own investing experience. I hope this gives readers a better idea of how cost averaging works.

The idea is to make regular investments of equal amounts, regardless of market prices and performance. Thus when prices are low more shares are bought and when prices are high less shares are bought. The average share price will be somewhere in between.

I made my initial investment in June 2010. I invested P5000, buying 2442 shares at a NAVPS of P2.0477.

My next investment was in July 2010. I invested P1000, buying 485 shares at a NAVPS of 2.0632.

My next investment was in August 2010. I invested P1000, buying 468 shares at a NAVPS of 2.1355.

My next investment was in September 2010. I invested P1000, buying 385 shares at a NAVPS of 2.5367. (I chose the front-end load option this month, so the net amount invested was P977.60)

I wasn't able to make my scheduled investment for October 2010 si I invested P2000 in November 2010. I bought 754 shares at a NAVPS of P2.5937. (I chose the front-end load option this month, so the net amount invested was P1955.20)

I missed my December 2010 investment so I again invested P2000 in January 2011. I bought 814 shares at a NAVPS of 2.4557.

I've invested a net amount of P11932.80 so far, buying 5348 shares. The average NAVPS is P2.231264.

P2.231624 is higher than P2.0477, the price at which I made my initial P5000 investment, but it is lower than the P2.4497 NAVPS as of yesterday.

Stock Market Stuck?

We're almost a month into 2011 but the stock market seems stuck in a rut. This is not an easy time for investors who are news junkies or obsessive-compulsive. My fund's year-to-date performance is around -2.4%.
It might be tempting to move to safer investments, or pull the money out altogether. Others may see it as an opportunity to invest at a lower price. Like I mentioned in a previous post, this is called "cost averaging". It's not the only available strategy, but it is one of the easiest and also the most boring. The idea is to invest a set amount at regular intervals regardless of NAVPS. That way more shares are bought when prices are lows and less shares are bought when prices are high.
After a few months it gets really boring. And when prices are down it's still boring and new investors may begin to doubt the strategy. After all, there are no guarantees that prices will go back up. Hmm... I don't know the answer to that one. Let's see what happens this year.

Cost Averaging

In a previous post I mentioned that I plan to invest P1000 every month in a mutual fund.  This is a strategy called "cost averaging".  This way, less shares are bought when prices are higher, and more shares are bought when prices are lower.

For example if the NAVPS for June 15 is P2.00, then P1000 buys 500 shares.
If the NAVPS for July 15 is P2.80, then P1000 buys 357 shares.
If the NAVPS for August 15 is P1.80, then P1000 buys 555 shares.

The total investment amount is P3000 and the total number of shares bought is 1412, for an average cost of P2.12 per share.  If you were psychic you could have just waited for August 15 and the price drop, but that's beyond the abilities of most people.

I've read arguments online that over the long term investing a lump sum beats cost averaging.  Meaning, over a long period of time (say three years or longer) you'd probably make more money by investing a lump sum rather than investing a small amount each month.  That's a good argument, but not everybody (including myself) has a large lump sum to investment.  Cost averaging allows ordinary investors to regularly invest without having to time or predict the market.