Cost Averaging... It Makes Sense (Dollars & Cents)
Yvonne Volante
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 the market?
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.
Why?
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 invest?
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?
Yvonne Volante is the webmaster for
http://www.fyinvest.com which is the premier invest site on the
Web. Visit http://www.fyinvest.com
to learn about different
investment ideas and strategies.
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