Are you investing for the long term? If you are ready to start to invest in the markets, and you?ve been learning the basics of investing, you have probably learned that over the long term, stocks are expected to generate a healthy return that typically outpaces inflation. However, the key is to stomach the ups and downs in the interim. I?m not sure if you?ve been watching the markets lately, but August and September of 2011 was a pretty scary time in the markets. But if you look at a chart of several years together, those two months are merely a blip on the radar.
When you decide to invest long term, you want to build a consistent investing strategy. If you try to only put money in when the market is going up and get scared and sell when the market is going down, you are going to be pretty upset at your stock?s poor performance. That?s because emotions cause investors to buy high and sell low. But if you want to make money in the stock market, grow a portfolio for retirement, and build wealth, you will have to buy low and sell high. I know that seems simplified but it is a simple concept that still appears to evade the average investor.
Dollar Cost Averaging
As you start to build your portfolio of stocks I?m sure you are not putting all of your money in at one time. You are continually saving and investing as your income comes in. Now, if you?ve just won the lottery and accepted a lump sum check to put in the stock market, that?s a different story. But getting into a fully diversified portfolio takes time. If you make a purchase every other Friday when you get paid, sometimes you will be buying high and sometimes you will be buying low. On average, your cost to get into the stock will be less than what it would have been if you had bought in all at once. This is called dollar cost averaging. It pulls the emotion out of trading and puts the law of averages on your side. The short term movements will cause the stock price to rise and fall around an average number, in time, if the stock is a good one, the price average will continue to rise and you will benefit from a lower average cost.
DRIPS to Dollar Cost Average
Another good way to dollar cost average is to reinvest dividends. When a company pays out a cash dividend, it typically comes to your brokerage account and just sits in the account as cash. Some brokers will give you the option to automatically reinvest your dividend without charging you a transaction fee. On the day that the stock trades without the dividend, called the ex-date, you will benefit from the opportunity to reinvest the dividend at the temporarily lower price. The price is usually lower because there are some people who only buy a stock to get the dividend and then they sell it after the ex-date. These are mostly traders who are not in for the long term.
Using a Broker to Dollar Cost Average
Like I mentioned, there are a few brokers that will allow you to buy into stocks on a set schedule with a fixed dollar amount. On occasion, this will cause you to buy fractional shares. Every broker does not allow this but there are some that do. Freedom Investments operates BuyandHold.com and you can invest as little as 20 dollars into any stock. If you want to buy a stock that trades at 100 dollars for one share, you would own .20 shares with your 20 dollars. There is a fee to trade similar to any broker. Sharebuilder is another popular broker that gives you the opportunity to invest small amounts on a set basis. Both of these brokers also allow automatic reinvestment of dividends so you can grow your nest egg even further.
What about you? Are you using dollar cost averaging to grow your portfolio?
Source: http://www.fiscalphoenix.com/dollar-cost-averaging-and-long-term-investing/
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