Squeeze the Stone

Archive for the ‘Financial’ Category

Of course you don’t, nor does anyone want you to. When you begin paying yourself every month, as you do with a retirement plan, not only do you get more long-term bang for your buck, you also take the risk out of investing this money. So you don’t have to be afraid. When you put the exact same amount of money month in, month out, into the same investment vehicle, you are taking advantage of the investment strategy known as dollar cost averaging. It puts time, your money, and the market all on your side at once. (We’ll talk about this more later.)
I believe this with all my heart, but regardless of what I say or what anyone says, you should invest only if you want to. The reason I say only if you want to is that even though investing for growth may be the right thing for you to do economically, it’s not the right thing to do if it keeps you up at night worrjing or makes you afraid all the time. As you’ll see in the next chapter, you must always trust your own gut feelings about money. If you can’t live with risk, you must invest where you feel safe investing. Perhaps your new truth will make you feel stronger about taking risks. Maybe reading throughout the rest of this book will make you feel differently about risks and your fears about money. But respect yourself first, and however you choose to invest, take care to understand how things work—or you might end up doing what Michael did.

Michael is investing here for the long term, not just for a year, and this fund is not going to stay down forever. Let’s take dollar cost averaging through another year.
Let’s say the market starts to rally, as it always does sooner or later, and he keeps putting in the $750 every month. Since the market is going up, by the end of the year he has been able to buy 685 shares, fewer than the year before; the fund ends up the year at $15 a share.
In total, he has put in $18,000 over the two years, in a fund that started at $15 and ended at $15 but was considerably down in between. He now owns a total of 1,450 shares, 765 from the first year and 685 from the second. But since the market was down so much of the time, what’s the best you think Michael can hope for—that he broke even? He did better than that. At $15 a share his total shares are worth $21,750, which is a 21.7 percent gain on his money over the two years of market fluctuation. Not bad, huh? If you’re not going to be cashing out for years to come, the more shares you accumulate the better. When the market does skyrocket, you will have made very good money.
This is not to say that if you buy stock that starts to go up, you should be sad—but here is a no-lose case, because you win in the end with a downslide as well. With dollar cost averaging you don’t lose as much as you could have if you had invested in one lump sum just before the market goes down. If the market goes straight up from the time you started, you won’t make as much, either. In my opinion, this is a really safe way to take risks—the best of both worlds.