Squeeze the Stone

Posts Tagged ‘Money’

With dollar cost averaging, you are taking the money you’re investing and averaging the cost of the shares you’re buying over time. Since you are investing every month, wouldn’t you rather buy into your funds when the market is low, so you don’t have to pay so much for your shares? Of course you would.
When what you are buying goes down rather than up, that means you’re paying less and are able to buy more. I always think of it as a mutual fund sale—getting what I want for less than others had to pay just a few months earlier. Michael got upset because the shares he bought went down in price over a few months. Had he stayed in for the long run, however, he would have made everything back plus more when his mutual fund started to climb again.

Michael also wasn’t trusting the principle that time creates money. The first thing you need to know about investing is that there has never, in the history of the stock market, been a ten- year period of time during which stocks have not outperformed every single other investment out there, regardless of the day that you invested. Even if you had invested in a variety of stocks the day before the October 19, 1987, crash, when the market went down five hundred points, ten years later, had you left the money there, you would have made far more than with any other investment. At forty, Michael had twenty-five years for the money to grow before he would turn sixty-five, well more than the ten it generally takes to watch your money really grow. I am always thrilled for myself and my clients when the market goes down and we have money available to buy more shares.
The best investment advice I could give Michael was to go back into the 40 1(k) and take that $750 he wants to put into it every month. But this time he should diversify the money among two or three other good funds in the plan, be patient, and wait for time to touch his money.
This kind of investing is being respectful to what you have and respectful to what you want to have. It is not going out on a financial limb or taking a gamble with everything you have.
But you also have to watch over those things that whittle away at the money you want to create. You must also be respectful to the money you don’t have.

When I say you should be happy if your fund starts to go down as you’re buying it, I mean be happy if all the funds that are similar to yours are also going down. You want to make sure that your 401(k) plan, and any other mutual funds you hold, are with a good portfolio manager (page 204), one who is able to do as well as or better than other comparable managers. If your fund is going down and the others are all going up, then you do need to take action; check with your human resources department. If the market starts to go down, just keep an eye on your funds to make sure they’re not going down more than other similar funds. If your portfolio manager can keep your money from going down as much as the others in a down market, think what she’ll be able to do when the market goes back up!