Dollar-Cost Averaging is the process of purchasing securities over an extended period of time with the same dollar amount each time. Lump Sum investing on the other hand, involves just putting all your money into the market at once.
For example if you’re wanting to invest $100,000 should you put it all in the market all at once or over a few months? Many people might suggest putting it in over a period of time. However my suggestion is that for most cases, the opposite is actually the wisest move. Let me explain.
If you were to run with the $100,000 example, a simple dollar cost average might look like putting $5,000 in the market for 20 months. The other scenario is just putting the $100,000 in right now.
In most cases putting everything in is a better move because on average, the market goes up most of the time. So if you dollar cost average, you’d, on average, be missing out on the growth by keeping your money out of the market.
In the smaller percentage of times that the market goes down directly following investment, then dollar-cost averaging can make sense. For example if the market has been Bullish for many years with PE ratios climbing, looking at dollar-cost averaging can make sense.
Before I finish, please click here to take a look at a blog page that covers many investment topics. He has a post from early this year that covers this topic concisely: Exploring Dollar Cost Averaging Verses Other Strategies
Thanks, hope you have a great day.
When it comes to picking specific stocks for investment, there are two ways to analyze them. The first is Fundamental Analysis.
Fundamental analysis the process of examining a company’s “fundamentals”. This means you look into their balance sheet, their income statement and the statement of cashflows. You look at the concrete facts about the company.
Ask questions like, is this business profitable? Do the facts suggest it will increase profitability in the next few years?
What kinds of debts (short-term and long-term) does this business have? Will it be able to pay them?
What weaknesses are there to this business and its market that could challenge its position? What are its strengths?
The second type of analysis is Technical Analysis. This involves projecting the stock price based on the trends. You look at the 50 day moving average, and even the 200-moving average. This is more of a charts and trends-based analytical process.
Overall, for long-term investors, fundamental analysis is the way to go. Not only does Fundamental analysis involve more logical and foundational decision-making, it is also the strategy used by some of the best investors in the world like Warren Buffet. Overall, if you’ll wondering which strategy is best, consider your purpose for investing.
I am going to briefly cover the top most widely used “investment” strategies for stocks. Technically not all of these methods are investing because a few of them involve short term trading.
1. Stock Index Mutual Funds
There are many types of indexes. Indexes are essentially a predetermined basket of stocks that are formulated using a set of rules. For example the most widely used index, the S&P 500, is an index that incorporates the 500 largest companies in the US and weighs them in the index accordingly. There are other indexes such as small-cap indexes or tech stock indexes. The bottom line is that with an index you are purchasing a tiny portion of a large basket of US stocks that is going to reflect your sector of choice.
2. Actively Managed Mutual Funds
Actively managed indexed funds are very similar to indexes except for 1 key difference: They aren’t bound by a predetermined set of guidelines. For example an active mutual fund might have a focus on large-cap stocks or international stocks, yet there aren’t any rules on how much of each of these have to be purchased. This is different from an index where the predetermined weight of each stock is set in stone. Out of this difference comes an increase in management fees because of the funds active, and therefore more costly management structure.
3. Value Investing
This is the method used by the smartest and most successful investors (in my opinion). Warren Buffet is the most famous example of this. Value investing involves determining a company’s value (regardless of current perceived value) by looking at a balance sheet and income statements using fundamental analysis. As the investor sees a price drop well below it’s determined real value the value investor can seize up good deals and hold on for the long-term.
4. Day Trading
This is a common strategy by short-term investors who use primarily technical analysis (looking at charts and trends) to make “investing” decisions about which stocks to buy and then sell quickly for a profit. The risky thing about this is that if you accidentally buy a stock or ETF that suddenly drops in price, you could get stuck with a plummeting investment that was truly overvalued.
5. Random Strategy
This strategy is specifically for people who don’t know what they’re doing and don’t even pretend to try to act like it. They randomly purchase stocks that “sound cool” and then hope that they rise in price. By far this is the stupidest strategy just behind day trading. You can lose your shirt much easier with mindless/random investing or day trading than you can with the other strategies I outlined above.
Whatever you do, please don’t choose route 5, and preferably strategy 4 as well. Not only is day trading risky and the fees expensive, it has also be statistically been proven to outperform traditional investing methods over the long-term.