In the world of investing there’s what I like to call the big 3, in regards to investment strategy. There’s the “Buffet Rule” better know widely as “Value Investing”; which focuses on the company’s fundamental rather than the stock price. There’s growth & technical investing, these strategies involves technician analysis in addition to growth companies with the highest upside. And lastingly, Day and Short-term trading, which is exactly what it sounds, a trade that is as short as 24hrs. But there is another strategy that isn’t as widely used as the other three but has been gaining traction over the past decade or so, Dollar-Cost Averaging.
Essentially, you invest a fixed sum of money into Mutual Funds, ETFs or individual shares on a regular(weekly or monthly) basis regardless of where the market stands. Dollar-cost averaging can be emotionally difficult at times(especially for investing novices) if you don’t know what to expect. By investing on a regular basis, you will also be investing during bear marketing and corrections. Which means you could reach a phrase where you’re buying even when fund or individual is have consecutive bad weeks or months. But the overall risk outweigh short term pain you might experience.
By putting in a fixed amount weekly, bi-weekly, or monthly, you are buying more shares when the prices are low and fewer shares when the prices are high. Though this is a investing strategy itself I believe it requires a sub-strategy within its implementation. This strategy should not be used against highly volatile companies that have high swings in stock prices, that would cause you to go from being able to buy 10 shares one week but only 1 shares the next. This strategy is best used for fundamentally sound companies, preferable those that buy an attractive dividend.
Mutual funds and ETFs are so vastly diversified that they are less prone to market volatility so they are already structural forms to suit this strategy. And if you pick the correct one they will also pay a fund dividend. But the real back bone of this strategy is the compound interest mechanism at its core. This strategy seeks to have you invest a fixed amount monthly and then have you reinvest your dividends or ROI amassing more shares. Thereby multiplying your return 3, 4, 5, perhaps even 10X fold.
This strategy should sound familiar with our investment club members because we sorta of use a hybrid version of this strategy with our monthly contributions and survey votes. Though we might not buy all the same securities every month we have in our portfolio we buy at least one of those holding with each monthly contribution. This is a highly effectively strategy not widely yet practice but I think as people become more financial literacy will take on more visibility.
Jamaal W Vetose
Todd Capital Investment