In order to effectively communicate this important concept I had to take specific steps in order for you guys to be able to fully grasp the power of this technique!
Last week we talked about the amazing super power we all possess called Compound Interest. Just to recap it is the interest earned compounded on interest earned in the future which grows exponentially. When paired with time, this exponential growth can result in tremendous earnings!
By understanding dollar-cost averaging, it becomes evident as to why compound interest is such a big component of this technique.
So what is “dollar-cost averaging”?
Dollar-cost averaging is the act of continuously placing money into the market despite the condition that it is in.
By deciding on a specific amount of cash to invest every couple of weeks, we can consistently pump more liquidity into our investment pool. As this investment pool inevitably grows (as time has shown the market always grows even after large economic turmoil)
I know this probably sounds counterintuitive but trust me, trying to time the market actually damages your returns instead of helping them nine times out of ten because you are actually missing out on potential returns from your money not working continuously. Think about it.
Through broadly diversifying in index funds, REITS, ETFs and stocks with a substantial growth rate, the market has always proven to grow over time. Because of this, you always want your money in the market to allow it to compound and grow over time.
Trying to time the market can actually diminish your returns because your money isn’t working for you. Moreover, who’s to say that you will be able to time everything correctly? Even the legendary Warren Buffet explains ,”Since I know of no way to reliably predict market movements, I recommend that you purchase Berkshire shares only if you expect them to hold them for at least five years. Those who seek short-term profits should look elsewhere.” Not even the Oracle of Omaha knows how to reliably predict the market on a consistent basis. Because of this, Mr. Buffet has become a strong advocate for the investing technique of dollar-cost averaging.
Market Timing OUT Dollar Cost Averaging IN
One of the most common investment techniques that the common investors attempts to follow is the infamous buy low and sell high. Although this concept seems to be simple, it can drastically hurt gains.
There are many issues with trying to time the market. These obstacles include..
1. Poor timing can hurt earnings
Although most of us would like to believe we know exactly when a company, ETF, bond, or commodity will make an upturn or downturn it is ignorant for us to believe that we can do this on a consistent basis. Yes, there are geniuses of the day who beat the odds more so than others and have made a fortune from it. HOWEVER, from a realistic standpoint I am trying to establish a system within your lives that you may be able to keep up with consistently and not have to know every single action that a corporation takes in order to successfully compound your money.
2. Upturns and downturns will effect your emotions
Let’s face it, constantly researching and trying to time the market will provoke many emotions inside you as you’re in a constant state of trying to beat the market. As you would gain more returns from timing the upturns and downturns correctly, it can be detrimental to your earnings if you accidentally put money in at the wrong times and decide to pull out when the market takes a large hit. Emotion is the number one enemy in investing because your mind will (I repeat WILL) try to pull tricks on you. Become the master over your mind and eliminate emotional investing by utilizing dollar-cost averaging.
3. Constantly pulling your money out diminishes your compound interest!
This may be one of the most important reasons why market timing can be detrimental to your investing future. Because we are constantly moving money in and out of the market, we lose out on the interest that we learned about last time! By keeping the money working over time, we actually experience a bigger return rate as long as we are putting our money into the best long term investments.
Begin Using Dollar Cost Averaging Today!
Now that we have a better understanding of this concept it’s time for us to begin implementing our new found technique! Which brings me to my number one rule of investing.
NEVER TAKE YOUR MONEY OUT OF THE MARKET WITHIN THE FIRST YEAR OF YOUR INVESTMENT.
This is by far the most important rule of investing I can pass on to you. The moment that money gets put into the stock market don’t ever touch it again. I promise you will be tempted to but next week I am going to provide exactly how I avoid these temptations and create circumstances in my life that help me eliminate the possibility of emotional investing.
Use this concept with care! No matter the condition of the market, as long as you have stocks that grow with the market on a consistent basis, you will see a substantial amount of returns over the long run.
Next week I will provide exactly the percentages that I use to allocate my money across different parts of my life. This will in turn fuel your use dollar-cost averaging and will automatically tune your investing skills in a way to diminish the possibility of emotional errors.
As always if you have any questions or ideas don’t hesitate to reach out to me! I love all of your feedback as it allows me to make better content for all of you!
Andrew Martinez, owner and writer of Minerva Money
YouTube: Andrew Martinez