Cost Averaging - It Makes Sense (Dollars & Cents)
It's no secret that the market goes UP...the market,
goes DOWN. That's the basics of Investing 101.
For many of us the shape of the market day to day has
about as much influence on our lives as the time of the
tides that day. But for investors - especially first
time investors - it can be a rollercoaster of heart
racing highs and stomach churning lows. Every movement
is being carefully reviewed and if it turns down then
investors with itchy feet jump out.
If you know the benefits of investing, how can you
avoid the stress of putting your hard earned money into
Financial planners and investors are quite clear on the
subject. New investors should not make an investment
unless they are going to let it sit at least 5 to 7
years - the longer the better.
Well, the economy DOES move up and down, but we have
never seen it bottom out (and if it did - well, you'd
have much bigger concerns than your investment).
By selecting a diversified portfolio, such as a mutual
fund, you can usually base your prediction on past
activity and you'll see that in any 7-15 year period
the investor always came out with more than he put in.
How do you take advantage of that? When should you
Well, if shares were being sold for $10 each and you
had invested $100 you would have purchased 10 shares.
Now, if that is your whole investment you would be very
upset if the value went down to $5, wouldn't you? Now
your stock is worth $50. What would you do? Sell before
it goes lower and loose $50?
Using the 'Cost Averaging' technique:
Cost averaging means you continue to put the same
amount of investment into the market regularly -
preferably every month. Now if you did that you would
have invested another $100. At $5 a share you would buy
20 shares. Right now you have invested $200 but only
own $150 worth of shares.
What happens when the price goes up?
When the price goes back up (and it will) it may stop
at $8 per share. Now what? Well, you invest your next
$100 and buy 12 shares.
You now have 42 shares valued at $8 each. That totals
$336. Your investment was $300 so you just made 12%
off of your investment.
Combining the cost of averaging with the 10%
recommended for us to set aside for savings or
investment - what's stopping you from jumping in?
Lucy Vestirian is the webmaster for
www.fyinvest.com">http://www.fyinvest.com which is the premier invest
site on the Web. Visit www.fyinvest.com">http://www.fyinvest.com to
learn about different investment ideas and strategies