Invest as Often as You Can Part 2
This week, I'm going to show you how you can earn more than the return delivered by your investment. If your investment earns some percentage per year, we're going to use timing to get better returns. And this timing strategy can be used by all of us, as long as we are diligent, and as long as we don't outsmart ourselves.
Rule #1: the best time to invest is today. Indeed, it is the only time we have. If you have a lump sum of money to invest, the best time to invest it is today.
If, however, you are interested in earning rates of return that possibly exceed the rates of return of your investments, then consider investing money over the days and years ahead of you, as the money comes in. This timing strategy is called dollar cost averaging.
Let's look at the Yahoo Finance web site. The name of the investment I am going to use in our example is available upon request, so let's just call it "anonymous stock investment." Every dollar invested at the beginning of 2004 would have grown to $2.17 by the beginning of August, 2014, before fees and expenses, according to Yahoo.
The average annual rate of return for this investment over this period of time was 7.54% per year. If you invested a little money every month, then the average rate of return grows 13.24%. How did we nearly double our returns?(A)
By not thinking about it and simply investing a little bit of money every month.
By simply putting the investments on auto-pilot, we took timing out of the equation. By investing every four weeks, we were within two weeks of the bottom of the market. By the same token, if we are at a peak (as we were in 2007), we bought near the top. Investments made near the top of the market lost more and ended up with a lower average rate of return compared to our initial investment; but these "dogs" were far outnumbered by the investments that we bought, consistently, at cheaper prices than the average. Over this period of time, the results favor the diligent, dollar-cost-averaging investor.
Different investments will perform differently. Different time periods will yield different results. You cannot control either the rates of returns of our investments (I wish everyone would admit that!), nor can you determine when they will go down (in the future). You can, however, potentially create much larger returns by controlling what you can control. In other words, you can, and should, invest as often as you can. (*)
On the other hand, not everyone agrees with this philosophy. So, to keep things fair, here is one web site that, at first blush, will appear to argue with our philosophy. Refer to rule #1: the best time to invest is today. Indeed, it is the only time we have.
Create a beautiful week!
Karl Frank, MBA, MSF
Certified Financial Planner (R)
A & I Financial Services LLC
A. Our own calculations are available upon request.
*This example assumes that all dividends and capital gains are reinvested and that no withdrawals are made from the investment. Dollar cost averaging cannot ensure a profit or prevent a loss in a declining market. Past peformance is not a guarantee of future results.