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Afraid to Invest? Try Cost Averaging...
The market goes UP...the market goes
DOWN.
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?
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