Archives For Investing

Previously I wrote how investing a little each month will make you rich [What is Dollar Cost Averaging? Drip Your Way to Millions]. The question remains of where should you place this money each month?

I have an idea, though it is rather boring–yet it can make you rich. Gather around home plate and I”ll tell how investing in boring index mutual funds can make you more money than a minor league pitcher.

Boring Index Funds Can Make You Rich: Being Above Average is Tough Stuff

I love to be above average, don’t you? Here is a little secret I learned–all the above average people from around the world move to cities like New York and Los Angeles. Thus to be above average in such a world class city, you must be in the top percentage of the U.S. and maybe even the world to stand out.

To be above average in the investing world year in and year out is nearly impossible. Yet, millions of investors are following fund managers who are trying to be better than average.

Some years they succeed and some years they fail. What results are higher fees and taxes associated with the mutual fund due to buying and selling seeking gains.

For most investors, being average combined with dollar cost averaging is good enough to reach millionaire status.

Boring Index Funds Can Make You Rich: An Average Batting Average Makes Millions

Lego batter

Baseball players only have to be average when batting. Credit  eva.pébar.

If you know anything about baseball, you’ll recognize that professional baseball players can make a lot of money.

Let’s take Aubrey Huff, 1st baseman for the 2012 World Series winning S.F. Giants, as an example. He made a cool 10 million and batted .207 in regular season play. (The best 2012 batting average was Buster Posey at .336)

While batting average isn’t the only value Mr. Huff brought to his team, he was in fact average–hitting about 2/10 pitches, yet he makes millions.

Index funds can help you do the same.

Why Boring Index Funds Can Make You Rich: Be the Benchmark

What is an index fund? An index fund is formed from a major measure of the stock market, like the S&P 500 Index or the Russell 2000 Index.

An index fund is a mirror of these measurements. Thus an S&P 500 Index Fund is a combination of the largest 500 companies as reflected by the S&P’s rules of inclusion for their index.

Here’s where it becomes ironic. These measures on which index funds are based are the benchmarks in which managed funds are trying to beat.

Why not become the benchmark and be average. Sure, you might not strike it big some years, but you won’t also hit as low of bottoms either.

Index funds have:

  • Lower expense ratios and fees than managed funds.
  • Less ‘turnover’- buying and selling of stocks through the year resulting in more taxes.
  • Index funds outperform most managed funds over the long term.  Need proof? #1 #2 #3
It is very difficult to predict which funds, the small percentage that do exists, will beat the benchmarks over the long term. Can you find a needle in a haystack? Index funds are one of the few places where being average and boring isn’t a bad thing. In fact index funds could make you rich.

 

*As always consult an investment professional before beginning investing or changing your investing strategy.

 

What are your thoughts or questions about investing in index funds? 
Buying in bulk as an investment? Photo Credit: Thomas Hawk via Compfight cc

Buying in bulk as an investment? Photo Credit: Thomas Hawk via Compfight cc

On my drive home from work I heard about an interesting alternative investing strategy that even Mark Cuban (billionaire) endorses.

“The money you save by investing in bulk will provide a better return on investment than any investment vehicle on the planet.”- Mark Cuban from NPR article

Buying in Bulk as an Investment Strategy

We can all agree that there aren’t many investments that are paying decent rates. Heck, savings rats (not mis-spelled) are at all time lows along with their money market cousins. More rats!

What can we do, but put it all in the stock market to hopefully keep up with inflation? You can forget about trying to keeping up with college inflation rates of 7%+.

Inflation is the pace car investors are trying to beat.- @ontargetcoach

Buying in bulk can unleash the current purchasing power of your dollar in anticipation of higher rates of common products.

Buying in Bulk: Smart Shopping or an Investment?

We already know buying in bulk from places like Costco and Sam’s Club will save us money on common items like bags of ice.

That’s just smart shopping, but could buying in bulk be considered an investment? Perhaps.

In the interview, economist Russ Roberts suggest buying items that will likely increase in price and that you’ll end up using like trash bags, laundry detergent, undershirts, toothpaste, etc.

Non-perishable items are best. [Random Thought: That would stink to have 50 gallons of shampoo in the basement and then go bald.]

If you already have a firm handle on your debt with an emergency fund in place AND inflation rates continue to outpace savings rates and money market funds, then buying in bulk could be a place to put some of your investments dollars.

For now, I’ll keep buying in bulk just for the cost savings and not an investment.

Though if I had an extra few hundred and came across a good deal, I might be convinced to “invest” in a socks and underwear for the next decade.

What do you think about buying in bulk as a viable alternative investment strategy? 

Science Experiment

I put Dollar cost averaging to the test with $500 on the line. Credit paladinsf.

I believe as a financial coach and financial writer I should eat my own pudding.

Following my article What is Dollar Cost Averaging: Drip Your Way to Millions, I decided to follow my own advice and devise a dollor cost averaging (DCA) experiment.

Remember the reason we dollar cost average is to spread out our investments since we don’t know what the market will do in the future.

*If you’re in the UK it’s called pound cost averaging. Fun fact eh?

The DCA Experiment Plan

I decided to invest $500 in a S&P 500 Index Fund for 5 consecutive weeks. I could have staggered it out for 5 months (1x per month), but I don’t like my money sitting on the sidelines for too long.

I invested $100 per week starting in February.

The Dollar Cost Averaging Experiment Results

The below is a summary of the 5 transactions.

S&P 500 screenshot

 

  • The average purchase share price was $139.36
  • The market did very well during this time period (near market highs).
  • If I had invested all $500 on 2.7.13 at a share price of $137.95, I would have been able to purchase 3.624 shares vs the 3.587 shares actually purchased–a difference of .037 shares.

Final Thoughts on my Dollar Cost Average Experiment

So in the end, my Dollar cost averaging experiment showed that a lump sum would have fared better in the end than DCA.

We don’t know the future and what the market will do from day to day.

My experiment could have easily gone in favor of Dollar cost averaging (Pound cost averaging), should the Sequester tanked the market, a bad jobs report, or Apple released another Apple Maps like debacle.

Does that prove that DCA is a bad idea? Will I abandon DCA in the future?

NO WAY! I will continue to engage in dollar cost averaging to smooth out my investments in the market. I’ll take a loss of .037 shares from time to time to hedge against the highs and lows of the stock market.

What are your thoughts about my Dollar cost averaging experiment? Do you have any conclusions I missed? 

faucet dripping

Drip your way to millions with dollar cost averaging. Credit r. nial bradshaw

If you have destroyed debt and saved up an emergency fund, then it’s time to start investing for the future. Learning how to invest money isn’t hard, yet like swimming takes practice.

I advise consulting an investment professional before you delve into the world of investing. [How to Choose an Investment Professional]

One basic investing technique is called dollar cost averaging.

What is Dollar Cost Averaging?

This is a very basic investing principal. I’ll admit it’s not sexy, nor will dollar cost averaging earn instant rewards. It can however provide a basic blueprint for investing over the course of your investing career.

Dollar cost averaging is basically investing a certain amount from your paycheck each month year after year. The cost of your investment will thus be averaged out over time.

drip. drip. drip. drip. That’s the sound of dollar cost averaging (or pound cost averaging for my U.K. readers).

If you invest $50 a month that is $600 a year. Up that amount to $416.66 a month and you’ve just fully funded your ROTH IRA for the year!

Why Use Dollar Cost Averaging?

So why use this method of dollar cost averaging (DCA)? I’m glad you asked. Here are a few common advantages.

  • You can’t time the market. This basically means you don’t know when the market will be high or low. If you invest a little each month, you’re investing at both high and low share prices–despite the wild swings of the market.
  • It automates and takes the emotion out of investing. If you invest only when prices are low, you’re not likely to invest.
  • You’ll buy more shares when prices are low since your dollar (pound) amount is set.
  • Dollar cost averaging ensures a good nights sleep. Since your investing plan is set despite changes in the economy, political elections, or zombie attacks you’ll sleep better. I can’t imagine trying to decide each paycheck if I’d invest or not.

*Note if you have a large lump sum and want to invest, dollar cost averaging may or may not not be best way to go. Consult a fee based advisor to determine what route is best for your lump sum.


More Dollar Cost Averaging Articles Across the Web

If you are ready to invest for 5+ years, consider including dollar cost averaging (DCA) into your financial plan. You’ll be turning on the faucet and begin dripping your way to millions.

Be sure to read the next article(s) in my investing series: Why Boring Index Fund Can Make You Rich, and My $500 Dollar Cost Averaging Experiment.

Have you used dollar cost averaging for your investments? 

Please subscribe to stay informed of future articles.

Railroad switch

Sometimes a different path is needed. Credit Mark Fischer

It is always a good idea to evaluate your investments every so often. I’m no fanatic and I invest for the long term, 5 or more years, but I do examine at few areas: earnings, fees, and the rate of return compared to the market.

Generally I only look at my quarterly statements, so I don’t freak out on days when I’m up or down thousands of dollars.

After a recent examination of my mutual fund portfolio I decided to make a change. I’m not alone; in fact million of Americans have switched mutual fund companies in the last few years. [This is not a recommendation to shift your investments, this is simply my story]

Why I Switched My Mutual Fund Company

1. I hate paying fees. I especially hate paying fees when a service looses money vs. their peers. I was paying yearly maintenance fees and also a hefty sales charge with each dollar invested (front load). As our portfolio grew the fees dropped, but it was still high.

2. Bad Performance vs. S&P 500- The markets have had a tough few years and I realize this. Yet, my old mutual fund family was lagging behind the S&P 500 and its peers. Apparently my managed funds as a whole haven’t had a good run, while index funds fared better.

3. My NonExistent Broker- For the last few years, my wife and have been fortunate to max out our Roth IRAs. Our broker earned commission on our ROTH IRA + Rollover 401K to IRA yet he was nonexistent.

Our broker didn’t call, email, send a newsletter, or follow up to see if we were going to max out again like the past few years. I’m sure he has bigger fish to fry, but a quick email or an ounce of client attention would have gone a long way.

My New Mutual Fund Company

1. I don’t pay yearly fees if I opt in for online statements. My sales fees are now some of the lowest in the industry. Over the lifetime of the investment, this will translate to thousands in cost cutting savings.

2. The majority of my mutual funds are now in index funds that will ensure I keep pace with the market. I won’t beat the market, but then I won’t dip below either. I’m OK with this.

3. Now there isn’t a broker getting fat of my regular investing. I only have myself to blame for improper allocation of funds.

That is why I use tools such as the Morning Star Instant X-Ray to break down my choices. I also plan on paying an fee based independent broker for a portfolio assessment when I hit a predetermined dollar amount.

Have you made any changes to your investments in recent years? Have you examined your mutual fund family to determine if it is still the best fit for you?