|
|
|
|
Dollar Cost Averaging
Investing your money in regular, defined intervals
will give you better odds of higher returns -- even in stagnant
markets. Take a look at the "markets" below. Which market
would you rather be in?
Dollar cost averaging would give us a higher return
in the "stagnant market" below, which moved from $10 per
share to $11.
Take a look at the numbers. In each example, we
buy $1000 worth of the stock at each price point. We end up buying
more shares when the price is low, and less shares when the price
is high. Dollar cost averaging thus makes is quite possible to make
a good return on our money in a market that isn't going anywhere.
|
Stagnant Market:
|
|
Price/Total Inv/# Shares
10 1000 100.00
12 1000 83.33
07 1000 142.86
11 1000 90.91
08 1000 125.00
13 1000 76.92
11 1000 90.91
Total Shares Owned: 709.93
Total Investment:
$7000
Total Value of Shares::
$7809.24
|
Rising Market:
|
|
Price/Total Inv/# Shares
10 1000 100.00
11 1000 90.91
11 1000 90.91
12 1000 83.33
13 1000 76.92
14 1000 71.43
13 1000 76.92
Total Shares Owned: 590.43
Total Investment:
$7000
Total Value of Shares::
$7675.54
|
If you're investing in regular intervals you'll actually
be hoping for a down market. You'll be able to buy shares at a
discount. Dollar cost averaging helps you to avoid the temptation to time
the market or try to buy low and sell high -- something that is virtually
impossible to do. So much so that even professional money managers cannot
do it. In any given year, about 90% of mutual fund managers will fail
to beat the S&P, even before fees and taxes!
If you are going to dollar cost average your investments,
be prepared to continue buying as the market falls, even after your broker
jumps out of his 97th floor window. Crashes are no time to stop your regular
investments. They are the best time to buy, but it will be extremely diffucult
to continue when everyone and their dog is screaming about the sky falling.
For this reason I would recommend setting up an automatic investment plan
with your favorite mutual fund company. Many will pull a set amount from
your bank account each month, automatically, and invest it for you in
the mutual fund of your choice.
A good place to start is with the Transamerica Funds.
Their S&P tracking fund (TPIIX) requires only $50 to start, and they
have an automatic investment plan. Unfortunately they are a mutual fund
and carry small but costly management fees. You'll also be responsible
for taxes incured when the manager buys and sells stocks to compensate
for the ass clowns putting money in the fund and taking money out a few
days later.
Another great place to start is with
ShareBuilder. I have an account with them that allows me to dollar
cost average my investments for $4.00 per month. They auto debit my bank
account and purchase shares in the S&P 500 for me automatically.
Because Sharebuilder commissions are so cheap, I would
recommend investing your money in index
funds using "exchange traded funds," or ETFs. These funds
are like stocks that mimic specific indexes, like the S&P 500 (ticker
symbol SPY) , the DOW (ticker DIA) , or the NASDAQ (ticker QQQ).
ETFs are advantagous because of their lower "turnover",
resulting in a lower tax bill for you. Normal index tracking mutual funds
are forced to buy and sell stocks throughout the year, creating taxes
that you must pay. Even if the value of your shares go down, and even
if you haven't sold any shares, you still owe taxes on your holdings.
Exchange traded funds like SPY are "closed ended," generally
have little or no turnover, and little or no tax burden when held for
the long term.
|
|
Common
Sense: