Afraid to Invest? Try Cost Averaging...
By Charles Hopkins
Published 04/21/2006 | Finance
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.
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?