dollar cost averaging

4 Simple Ways to Conquer Your Fear of Investing

Matt Bell — Wed, 06 Dec 2017 09:30:11 +0000

If you're nervous about investing in the stock market, you're not alone. Stock ownership in the U.S. is down, and a recent poll indicates that frightening memories of the last bear market may be to blame.

According to a Gallup survey, just 54 percent of U.S. adults own stocks, including those owned through mutual funds that people invest in via their 401(k) or other retirement accounts. That's down from 62 percent who owned stocks before the last bear market. During that devastating downturn, which began at the end of 2007 and ran through early 2009, the market fell by more than 50 percent. In part, Gallup blames the decline in stock ownership on that painful, fearful time.

"It appears the financial crisis and recession may have fundamentally changed some Americans' views of stocks as an investment," the company stated on its website. "The collapse in stock values in 2008 and 2009 seems to have left a greater impression on these people than the ongoing bull market that has followed it, as well as research showing the strong historical performance of stocks as a long-term investment."

If that sounds like you, here are some suggestions for overcoming your concerns. (See also: How to Get Over These 5 Scary Things About Investing)

1. Develop a healthy fear of not investing

If it's safety you're after, there are few safer places to put your money than a bank. Because deposits are insured by the Federal Deposit Insurance Corporation, you could put up to $250,000 in a bank account and rest easy knowing that if the bank went out of business, the federal government would make sure you got your money back.

While a bank account can be a good place to keep some savings for emergencies, right now many banks are paying just .01 percent interest, making them a horrible place to pursue long-term goals like retirement.

For example, let's say you're 30 years old and deposit $10,000 at .01 percent interest. In 40 years, your $10,000 will have turned into — wait for it — $10,040. That's right. After 40 years, you will have made just $40 on your 10 grand. And once you factor inflation into the mix, the buying power of your $10,000 will have taken a big step backward.

Let's say you earn 7 percent interest instead. In 40 years, your $10,000 will have turned into $150,000. And 7 percent is a very conservative assumption since the stock market's long-term average annual return has been 10 percent.

So, instead of being fearful about investing, it is more logical to be fearful about not investing.

2. Learn a little market history

Many of the mistakes investors make are due to their emotions. If the market falls, some people get scared and pull money out of the market, usually to their detriment. A little knowledge of market history can help you stay the course.

The longer you keep money in the market, the more likely you are to make money. When Morningstar analyzed the stock market's performance during each one-, five- and 15-year period from 1926 to 2016, it found that 74 percent of the one-year periods showed positive returns, 86 percent of the five-year periods generated gains, and 100 percent of the 15-year periods were up. In other words, based on 90 years of history, if you stay in the market for at least 15 years, it's a virtual certainty that you will make money.

Putting time on your side is also the key to surviving a significant market downturn. According to Morningstar, someone with $100,000 invested in the stock market at the beginning of 2007 would have lost nearly half that amount by early 2009. Brutal, right? However, if they had stayed invested, by January 2017 their portfolio would have been worth nearly twice its value on January 2007. Despite that horrible downturn, their average annual return over those 10 years would have been nearly 7 percent. (See also: How the Risk Averse Can Get Into the Stock Market)

3. Start small

If you have a chunk of money to invest but just can't work up the courage to hit "buy," consider investing a little at a time through dollar-cost averaging. The idea is very simple. Just take the total amount (let's say $12,000), divide by the number of months you plan to invest (let's use 12), and invest that amount at the same time every month ($1,000 per month).

If the market has a good month, your money will buy fewer shares. If the market has a bad month, your money will buy more. You never have to worry about getting the timing just right. By spreading your investments over a year a more, you minimize the risk of losing a lot of money through an immediate downturn. (See also: Is Dollar Cost Averaging the Right Strategy for You?)

4. Keep it simple

Investment terminology can be confusing. Diversification. Asset allocation. What does it all mean? You can put these helpful concepts to work without qualifying for a job on Wall Street by investing in a super simple target-date fund.

Because they are mutual funds, target-date funds are inherently diversified — that is, the money you invest is spread out among multiple stocks, bonds, or other investments. And they take care of asset allocation decisions for you. That means they are designed with an appropriate mix of stocks and bonds for someone your age. They even automatically adjust that mix as you get older, tilting their stock/bond allocation more toward bonds to make your portfolio appropriately more conservative as you near your intended retirement date.

It's understandable that the last bear market may have dampened your enthusiasm for the stock market. However, the market continues to offer most people their best opportunity for building wealth. The steps described above should help you wade back into the investment waters without fear.

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This article is from Matt Bell of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Is Dollar Cost Averaging the Right Strategy for You?

Dan Rafter — Mon, 24 Jul 2017 08:30:14 +0000

You've just received a bonus or an inheritance, and you know that investing your money in stocks and bonds is one of the best ways to create long-term wealth. But you're also worried that your investments might lose value instead of gaining it.

It's a common struggle: You want the financial rewards that can come with investing, but the potential risk of losing money nags at you. (See also: How to Get Over These 5 Scary Things About Investing)

An investing strategy known as dollar cost averaging might be the answer.

What is dollar cost averaging?

In dollar cost averaging, you invest just a small chunk of money at a time. This differs from the more traditional approach to investing, in which you'd invest all the money that you've targeted for stocks, bonds, or real estate at the same time.

Say you've inherited $6,000. You'd like to invest that money in the stock market so that it will grow over time. If you were investing in the traditional way, you'd invest that money all at once. With dollar cost averaging, though, you would invest more gradually, perhaps investing $500 each month throughout the course of a year. That way, you'd buy more stocks when prices are low, and fewer stocks when they're high. (See also: 9 Investing Questions You're Too Embarrassed to Ask)

The main benefit of dollar cost averaging is that it reduces your financial risk. Say you invested all that money in stocks at once. A market crash three months later would then impact all your money. But if you'd just invested, say, $1,500 before the market crashed, you'd still have $4,500 of your original $6,000 left untouched by the financial turbulence.

Paycheck contributions versus lump sum investing

If you contribute the same amount to your 401(k) every paycheck, that's equivalent to dollar cost averaging. By default, most people have the same amount deducted from their paycheck each month, so there is no choice to make. Dollar cost averaging, however, usually refers to a choice the investor makes when they've got a lump sum of money, such as an inheritance, royalty check, or bonus. If you don't have a windfall of some sort, you usually don't have to worry about whether or not to do dollar cost averaging.

Pros and cons

The main advantage of dollar cost averaging is the reduced risk of losing as much money in a market downturn. But there's another advantage, too: Dollar cost averaging makes it easier for reluctant investors to enter the market.

If you're hesitant about investing, you might find it easier to take the jump if you are investing a smaller amount of money. And that's a good thing: Over time, the stock market has tended to increase in value. If you don't invest, you won't get the chance to take advantage of this.

Anything that encourages you to invest — such as dollar cost averaging — is a positive.

There is a drawback, though, to this approach: By limiting your risk, you are also limiting the potential size of your financial rewards.

Because the stock market has historically increased in value over time, the odds are that you'll make more money if you invest a larger sum all at once. The sooner you invest the money, the more time it has to grow. By contrast, if you invest smaller bits of money over time, you will tend to see smaller returns in what has historically been an upward-trending market.

A recent study by Vanguard illustrates this. Vanguard studied whether people would see higher returns by investing a large sum of cash all at once or in smaller doses over a six-month period into a portfolio of 60 percent stocks and 40 percent bonds. They found that investing the lump sum of cash all at once produced higher returns about two-thirds of the time. The longer the investment period, the higher the chance that the lump sum investment would outperform the dollar cost averaging strategy. (See also: The Basics of Asset Allocation)

You'll have to decide whether the reduced risk outweighs the potential of losing out on bigger returns.

Of course, it's most important that you do invest your money over the long term. And if dollar cost averaging, and the reduced risk that comes with it, is what encourages you to do this, then it might be the best approach for you.

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This article is from Dan Rafter of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

7 Reasons You Really Need to Pay Yourself First (Seriously)

Kentin Waits — Wed, 07 Dec 2016 12:00:11 +0000

It's a familiar refrain in the world of personal finance: "If you want to build wealth, you've got to pay yourself first!"

But what does paying yourself really mean and how can such an odd-sounding notion radically alter the course of your financial life? Paying yourself first simply means setting aside part of your income in a savings or investment account before you do anything else — before you upgrade your smartphone, buy new jeans, pay the utilities, or spring for happy hour drinks for your three closest friends.

Thinking of your savings plan as a bill you must pay on a regular schedule automates the act of saving and can build significant wealth over time. Still not convinced it's the path of personal financial security? Read on. Here are seven reasons you should pay yourself first.

1. It Sets Proper Priorities

What's more important than funding your future? What priorities eclipse your family's long-term financial security? Paying yourself first sets in motion an idea that's crucial to successful saving: I matter and I'm going to start acting like it. Remember, wealth-building doesn't happen by chance; it's the result of intention, consistency, discipline, and big-picture thinking.

2. It's Easy

Paying yourself first through automatic payroll deductions is a simple and pain-free way to save. The "set it and forget it" approach makes saving and investing easy because the money is redirected to a 401K, IRA, savings account, or other investment vehicle immediately. Why is that immediacy so important? Because it helps avoid that nagging sense of deprivation that's laid waste to so many people's best financial intentions.

3. It Taps Into the Power of Dollar Cost Averaging

With dollar cost averaging, investors buy a fixed dollar amount of a particular stock or investment, no matter what the share price. Because the investment occurs at routine intervals, that fixed dollar amount buys more shares when the price is low and fewer when it's high. This investment technique helps avoid the risk associated with dropping a lump sum in the market at a moment when share prices are high (a move that gets you less for your money).

4. What's Last Is What's Left

There's a name for folks who try to save only what's left over at the end of the month: They're called spenders. New wants and needs always have a way of creeping in and rapidly consuming any surplus. Paying yourself first — taking your savings right off the top, investing it, and efficiently managing the rest — is a far superior strategy.

5. It Builds Discipline

Paying yourself first by contributing a fixed amount of money regularly to a savings or retirement account builds financial discipline — a discipline that can be applied in countless other financial and nonfinancial ways. As with all habits, saving becomes easier over time. As you watch your wealth grow, you'll want to find new ways to cutback on expenses, increase your income, and save more.

6. It Creates a Healthy Work/Reward Cycle

Ever feel like modern life is an endless cycle of work-spend-repeat? An effective way to overcome that nearly universal sentiment is by starting a savings plan and watching your wealth grow. Paying yourself first creates a new cycle — one where all that hard work steadily increases your net worth, expands your opportunities, and offers a level of freedom that more stuff simply can't provide.

7. It Models Smart Financial Strategy

I've always been an advocate of discussing money with kids. Of course, you don't want to burden children with adult money worries, but it can be immensely valuable to model and explain effective money-saving strategies like paying yourself first, avoiding credit card debt, and living within your means. Encouraging a level of financial transparency demystifies the world of personal finance and helps kids build the practical money management skills that will serve them well in adulthood.

This article is from Kentin Waits of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

7 Tips for Stress-Free Retirement Investing

Craig Ford — Tue, 12 Jun 2012 10:24:13 +0000

Most investors forget that investing is a journey, and the trip is just as important as the end result. Who wants spend the investing journey biting nails, losing sleep, feeding ulcers, and being paralyzed by fear?

For many investors today, that's what the investing journey is like. But it doesn't have to be. Instead, you need to be sure to follow a well-laid investing plan. (See also: 5 Killer Free Investment Tools)

1. Decide If You Should Be Investing in the Stock Market

I hate riding on roller coasters. I know there are a lot of people who actually like riding on roller coasters — and they'll gladly pay money to do it.

I won't.

Some of us just don't have the stomach for the stock market. There are too many dips and spikes, and the result is a lot of emotional anxiety.

If that's the case for you, avoid the stock market and find another type of investing (i.e. bonds) that involves less risk.

2. Invest According to a Game Plan, and Stick to It

Who really knows if this is a good month to be investing or not? I don't, and I don't listen to anyone who thinks they do.

Instead of looking for mystics and prophets, you should stick to one of the following common low-stress investing strategies:

Dollar Cost Averaging (DCA)

Dollar cost averaging means investing the same amount of money on the same day of every month. Many brokerages even let you set up electronic transfers, so you never have to be involved in the act of initiating your investing.

Value Averaging

Essentially, with value averaging, when the market goes down, you buy more shares, and when the market is strong, you buy less. This helps ensure you'll reach your investing goal.

Invest It When You've Got It

With the historic upward trend in the market, some people suggest that you should invest the money whenever you have it to invest. If you can do all your investing at the beginning of the year, you should, because the shares will probably be more expensive at the end of the year.

3. Diversify

If you've read a single article on investing, you've heard the word — diversify. Spread your risk out. Don't leave yourself exposed to serious losses with the immediate decline of any single company's stock.

4. Don't Listen to TV News About Huge Gains or Plummeting Stocks

The folks on the news get paid to do one thing — keep you watching TV. The best way to do that is to talk about big movements (gains or losses) in the market. While not everything is hype, there are certainly people who stick around to watch when their money is on the line. Instead, you should turn off the TV and go for a walk, read a book, or play with your kids. Those are much more productive uses of your time.

5. Don't Check Your Portfolio Balances More Than Once a Month

There are some people who sign into their brokerage accounts every day. That's crazy.

Investing is like a crock pot and not a microwave. When you put a roast in the crock pot, you walk away because it will be hours before something happens. There's no point watching what your investments are doing if you don't plan to access them for 20, 30, or 40 years. Set it and forget it.

6. Review Your Asset Allocation Twice a Year at Most

When some segments of the market are performing really well or very poorly, there might be some changes you should make with your asset allocations. Once or twice a year at most, you can move your investments around just to re-diversify to your intended asset allocation.

7. Remember That Even When the Market Drops, There Is Good News

When the market drops, stocks go on sale. Some folks in their 20s are complaining about how much the market is going down. What? That's good news for them. That just means they get to buy more shares while they are cheaper.

Change your perspective and remind yourself that when the market goes down, it's not all bad news.

Armed with these few stress-free investing tips, hopefully you'll be able to put your retirement money in the market, place your head on the pillow, and have a worry-free night of sleep.

What tips do you have for stress-free investing?

This article is from Craig Ford of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Pay yourself last is okay too

Philip Brewer — Sat, 26 Jan 2008 11:53:08 +0000

Every book on personal finance says that you should pay yourself first--get the money out of your checking account and you won't even know it's missing. There's a lot of truth to that, but the pay-yourself-first model has some downsides, as well. I found that paying myself last actually worked better.

Just to be clear, I actually did both: my 401(k) money came out before I got my paycheck, and that money made up the bulk of my savings when I was working a regular job.

In addition to that money, though, I was also saving some after-tax money, with an eye toward retiring before I was old enough to take money out of a tax-sheltered account. Over the years I tried various ways of getting that money into savings, but nothing worked as well for me as just waiting until the bills were paid, and then transferring what was left into my ING Direct account.

Regular savings

I tried putting a specific amount into savings each paycheck, and I tried putting a specific amount into savings each month. Both of those plans fell short, simply because of variations in the amount of money I spent each month. What with car insurance, renter's insurance, tax payments, my annual fitness center membership, car maintenance, shoes, coats, clothes, vet bills, and vacations, we simply didn't have very many months in the year when our expenses were average.

Unless the regular savings deposits were so small that money accumulated in the checking account (which is just what pay-yourself-first is supposed to avoid), we ended up having to raid our savings account to pay ordinary bills like the car insurance--and taking money out of savings as often as we were putting it in seemed to defeat the purpose.

I tried having two savings accounts--one where we put aside money specifically for expenses like insurance and vacations, and another where we put our long-term savings, but that was a whole additional layer of complexity that didn't seem to add much value.

Irregular savings

In the end, what worked best for us was just what the personal finance orthodoxy says is bad: we paid ourselves last. Each month, after we paid the bills, we looked ahead to see what expenses were coming up (we knew what we'd charged on our credit cards, and we knew which of the annual bills were coming) and we figured out how much money we needed to keep in the account to pay the foreseeable bills. Then, we transferred the rest to savings.

I think this worked for us because we got a lot of satisfaction out of putting the money aside. For us, it was literally more fun to save the money than it would have been to spend it.

We were pretty aggressive in saving money--aggressive enough that occasionally we had to take money back out of savings to pay a bill that came earlier than expected or turned out to be larger than expected. But that didn't happen so often that taking money out of savings turned into a regular thing.

One downside: irregular investing

Even though having the money in our checking account didn't result in us just spending the money, there was a downside to paying ourselves last--we ended up saving plenty, but not getting it invested as regularly as we should have.

Our 401(k) money got invested every two weeks, letting the dollar-cost-averaging thing work to our advantage. There's no reason that we couldn't have gotten our after-tax savings invested as well (and when I had a clear idea of how I wanted to invest it, I did), but for long stretches, especially when the market seemed a little high, I ended up just leaving our savings in cash. We'd have been ahead of where we are now, if I'd done a better job of getting that money invested regularly.

First, last, or middle: pay yourself

Unless you're like us--unless you get a big jolt of satisfaction out of doing that transfer to savings--you'll probably come out ahead by paying yourself first, just like the personal finance books say to do. But don't hesitate to give pay-yourself-last a try, if it seems like it might work better for you.

The only wrong way to put money in savings is not doing it.

This article is from Philip Brewer of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Dollar-Cost Averaging: my path to becoming a not-so-nervous investor

Julie Rains — Thu, 20 Sep 2007 22:18:42 +0000

Can the concept of dollar-cost averaging (DCA) help prevent nervousness in investors? (I think so.) But what is DCA and is it a viable investment strategy? If you are a seasoned investor with a large lump sum from a 401(k) rollover, property sale, inheritance, or other source, you are likely to think of DCA as second-rate or lower-performing strategy, which it in fact may be. But if you are a beginning or less experienced investor who has just a bit to invest each month ($25 to $100), then the DCA concept may help you feel comfortable in starting to invest and let you relax during market fluctuations.

Here’s a short definition of dollar-cost averaging from Kiplinger’s glossary: “a program of investing a set amount on a regular schedule regardless of the price of the shares at the time.”

As an illustration, suppose you decided to buy Janus Venture (JAVTX, a no-load, small cap growth mutual fund with a 4-star Morningstar rating considered high risk with above average returns) in September 2006, invest $100 per month for 13 consecutive months (Sep 2006-Sep 2007), and purchase shares sometime around the 20th of each month. I used MSN Money charts to find prices on specific dates in the past year.

By September 2007, you’ll have invested $1,300, purchased 19.46 shares at an average cost of $66.79, and have an investment valued at $1393; you'll have earned a return of 7.15% for this period. But, if you had invested $1,300 as a lump sum in September 2006, you would now have $1,549 and grown your investment by 19.15%. In this scenario, the DCA strategy is the lower-performing one. But, I am proposing that if you are a beginning investor and you did not have $1,300 in September 2006 but rather $100/month in investable income, then you are $1393 richer and now positioned for further growth (hopefully). Here's a spreadsheet with the monthly prices and my calculations.

It is argued, and convincingly to me now that I consider it, that DCA as a strategy for lump-sum investing is almost always not the best strategy because the market in general and individual investments in particular (no-load mutual funds in this case) rise over time. So, more often than not, the sooner you can make an investment, the better. In "The costly myth of dollar-cost averaging," Timothy Middleton of MSN Money states that dollar-cost averaging is not the same as investing regularly scheduled amounts but rather positions it as an alternative to investing a lump-sum amount. He mentions that this strategy is often pitched to nervous investors. If you define DCA as an alternative to lump-sum investing as Wikipedia does, consistent with Mr. Middleton's perspective, then DCA is usually going to deliver lower-performing results. Oddly, though, I had only heard of DCA in my finance classes in college and have never been pitched its value by investment salespersons (maybe I'm not a nervous investor).

Trent of The Simple Dollar writes about Dollar-Cost Averaging and uses a definition similar to Kiplinger.com and my understanding: "Dollar cost averaging is an investment philosophy in which you buy a particular investment regularly over a period of time with an equal amount of cash each time."

As for me and my portfolio, I didn’t start investing as a lump-sum holder but rather as an eager 20-something who, when I was able to start saving, figured that investing, over time, even small amounts, would reap benefits. My strategy wasn’t particularly sophisticated (just disciplined), beginning with a dividend reinvestment plan (DRIP), progressing to purchases of mutual funds, and then, much later, to individual stock investing. In my DRIP-and-mutual-funds-only days, shares were purchased when the prices were low and high. Here's what I learned:

Prices go up and down;
Sometimes you buy shares at attractive prices and sometimes you buy shares at not-so-attractive prices;
The value of your investments may decline during market corrections or investment-specific slumps;
Over time, the value of sound investments will rise.

So, DCA helped me get used to the idea that investing doesn't always provide a smooth ride but can deliver great returns in the long run. It's saved me from becoming a nervous investor (or at least one who doesn’t act rashly and sell during market lows) despite day-to-day fluctuations in my net worth.

Disclosure: I do not own Janus Venture, which is closed to new investors.

This article is from Julie Rains of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread: