As you can guess, one of the most common investment questions we get in our financial training line is about when to buy and when to sell investments to maximize return. My most common answer to this question is that if I knew exactly when to buy securities at the perfect price with perfect consistency, I would answer this question from my private island. In all seriousness, the nature of the rise and fall of investment often causes investors to stop making their long-term investment plans, which can severely damage their long-term results. Investment paralysis can cause you to miss out on the best returns on the market. If you are looking to buy and hold long term, there is a stock buying method that can help you get out of the ups and downs of the market and improve your returns over time: Average cost of dollars.
Easy to apply average cost of dollars
The beauty of the average cost of dollars is its simplicity. All you do is invest the same amount of money in your desired investment on a consistent basis over time (say every two weeks or every month, i.e. when you get paid). When the stock price is high, the number of shares you will receive for your investment dollar will be lower and when the share price goes down, you will get more shares for your money. You may already be using an average cost of dollars. If you participate in your employer’s 401 (k) or other retirement plan, the same amount of money is deducted from each pay slip and then invested at your choice.
Average cost of dollars works
Because the stock market goes through a lot of ups and downs over time, the chances of you being able to predict or spot the low in any consistency are extremely slim. This makes it unlikely that the gift and then investing all your money at once will pay off in the long run. But these fluctuations create the perfect conditions for an average cost dollar to activate its charm.
An example of the average cost of a dollar leading to higher returns
Suppose you set up a plan to invest $ 100 a month in a stock exchange-traded fund. The fund’s stock price typically ranges around $ 10 so you typically get about 10 shares for your monthly investment. But one month the market is experiencing a decline, and the stock price is dropping to $ 5. Your $ 100 investment buys you 20 shares.
You now have more stocks that will be worth more when the market returns to its normal level. In this example, the average cost of a dollar results in a return of 33% for our investor. Not bad for someone who has set up a simple investment plan and stuck to it.
Note: This is a hypothetical example and does not represent any specific situation. Your results will change.
The average cost of a dollar is not for everyone
Of course average dollar costs can be a disadvantage. Such a strategy does not guarantee profit and does not protect against loss in declining markets. If you are an active trader with a significant conviction regarding a stock price or ETF, you probably have zero interest in allowing your purchase price to be chosen at random. If you want to try something a little more active than the traditional dollar cost average, consider speeding up your purchases if you see a drop in the desired investment price. For example, if you have an average $ 10,000 investment per investment for 10 months, you can decide that if there is a significant reduction in the price of the security, say 15-20%, you can double your investment in that month in the market. dip.
Average cost of dollars helps change the way you think about investing
When you invest consistently every month, your mentality about the market and market news changes. About a month ago, there was news that the market had reached all-time highs. In an average dollar cost plan, I know my buying power is an automatic buy of fewer stocks.
At the time of writing this post, the news dominating the market is about a new version of viruses and CEOs are making significant profits. Can we get immersed in the market?
Investment does not have to be complicated
If you’re like most people, you would probably prefer to turn your average cost in dollars into something you should not think about. Most investment companies give you the option to set up automatic transfers from your checking account directly to your investment account, making the investment yourself almost as easy as accumulating a nest egg in the 401 (k) program. If you are still not taking advantage of the average cost in dollars, start now. As the old saying goes, time is money!