When can we say that our current losing position has improved?  Well there’s only one way to look at it, that is, if it is less negative if not positive.  So from a -15% to a -12% could be considered a 3% improvement in your current position.  Without doing anything the only way this can happen is if the price of your fund moves higher. 

 Can PCA Improve A Current Losing Position?

Earlier, we illustrated that PCA can reduce your average buying price as long as you are able to buy more shares at lower prices.  Therefore, PCA can improve your losing position by pulling the average buying prices below the original.  Hence, a 3% improvement can be attained by lowering your average price by 3%.

 Therefore, in principle, PCA can improve your current losing position.  But there is a catch though.  One, you need additional capital to pull this off.  And two, the additional amounts in total must be significant enough to even make a dent on your original lump sum investment. 

Say you invested P200,000 at the start of the year in a mutual fund that has a price per share (NAVPS) of P10.  Assuming no fees are charged, you were able to purchase 20,000 shares.  Unfortunately the price started going down for six straight months with no signs of reversing.  After six months you found your  investment losing by 20% as the price hit P8/share.  You decided to apply PCA for the second half of the year by investing P10,000 at the start of each month for the next six months.   

An evaluation of your investment strategy shows the following results:

• You invested an additional P60,000 (+30%) to perform PCA.
• With PCA you were able to add 7,966 shares (+40%) to you original 20,000 shares.
• The result of being able to buy more shares at lower prices reduced your average price from P10/share to P9.29/share.
• As a result of the lower average price, you managed to improve your overall investment performance from a -20% to -14% when the price ended the year at P8/share.

Aren’t you just throwing away good money after bad with PCA?

Not at all!  As illustrated earlier, PCA can work regardless of whether you are investing fresh funds or just adding to your currently losing investment to average down your price.  As mentioned earlier, PCA is not a perfect system.  It does have its pitfalls particularly in terms of opportunity losses.  Other approaches like Value Averaging may, perhaps, be more effective in certain market conditions.  However, if you are comfortable with a simple, easy-to-implement, and light-on-the-wallet type of approach then by all means do PCA and stick to it.

Warren Buffet suggested that the best holding period is forever.  For the short-term investors looking to make a fast buck, PCA is probably not your cup of tea.  But if you are a conservative, long-term investor, with a buy and hold strategy, this may just be the edge that you need to turn the current crisis into an opportunity to surpass your investment goals.