GRANT STATION HALL COUNTY

Dollar-average investing offers two advantages. The biggest is that you regularly invest—in both good markets and bad markets. If you buy $100 of stock at the beginning of every month, for example, you don’t stop buying stock when the market is way down and every financial journalist in the world is working to fan the fires of fear.

The other advantage of dollar-average investing is that you buy more shares when the price is low and fewer shares when the price is high. As a result, you don’t get carried away on a tide of optimism and end up buying most of the stock when the market or the stock is up. In the same way, you also don’t get scared away and stop buying a stock when the market or the stock is down.

One of the easiest ways to implement a dollar-average investing program is by participating in something like an employer-sponsored 401(k) plan or deferred compensation plan. With these plans, you effectively invest each time money is withheld from your paycheck.

To make dollar-average investing work with individual stocks, you need to dollar-average each stock. In other words, if you’re buying stock in IBM, you need to buy a set dollar amount of IBM stock each month, each quarter, or whatever.

Don’t Ignore Investment Expenses

• Investment expenses can add up quickly. Small differences in expense ratios, costly investment newsletter subscriptions, online financial services (including Quicken Quotes!), and income taxes can easily subtract hundreds of thousands of dollars from your net worth over a lifetime of investing.
• To show you what I mean, here are a couple of quick examples. Let’s say that you’re saving $7,000 per year of 401(k) money in a couple of mutual funds that track the Standard & Poor’s 500 index. One fund charges a 0.25 percent annual expense ratio, and the other fund charges a 1 percent annual expense ratio. In 35 years, you’ll have about $900,000 in the fund with the 0.25 percent expense ratio and about $750,000 in the fund with the 1 percent ratio.
• Here’s another example: Let’s say that you don’t spend $500 a year on a special investment newsletter, but you instead stick the money in a tax-deductible investment such as an IRA. Let’s say you also stick your tax savings in the tax-deductible investment. After 35 years, you’ll accumulate roughly $200,000.

Investment expenses can add up to really big numbers when you realize that you could have invested the money and earned interest and dividends for years.

• Don’t Get Greedy
• I wish there was some risk-free way to earn 15 or 20 percent annually. I really, really do. But, alas, there isn’t. The stock market’s average return is somewhere between 9 and 10 percent, depending on how many decades you go back. The significantly more risky small company stocks have done slightly better. On average, they return annual profits of 12 to 13 percent. Fortunately, you can get rich earning 9 percent returns. You just need to take your time. But no risk-free investments consistently return annual profits significantly above the stock market’s long-run averages.