Dollar cost averaging is like steroids for your money. The difference between doing it and not doing it has the potential to cost you hundreds of thousand dollars.
Long-term investing has been statistically proven to be anything but a gamble. For most newbies to the market, though, the thoughts of making that first dollar online and investing are still quite scary.
It’s like riding a bike without stabilisers for the first time – sure it’s scary without your safety net, but the risk is minimal to the reward. Even if you fall down a couple of times, with a little bit of determination, you can beat the market.
Dollar cost averaging is like steroids for your money.Tweet
The concept of earning interest is fundamental to living a happy life in any modern society. But, what most people don’t understand is that you’re always losing money. With every second that goes by you’ve lost money.
Every year, the cost of living rises by around 3%. Yes, it may seem small, but it is enough to cut into your real net worth in half every 17 years.
Put simply, 17 years ago, every pound could buy you double what you can get today for a pound. So, if you can afford a £250k house today, then 17 years ago, with £250k , you could’ve purchased two of them!
Ever heard that old analogy? Life is like going the wrong way on a moving sidewalk. Stand still and you go backwards. To get ahead, you have to hustle.
Well I want to scrap that. I say that your money has to hustle. Not you. You have to make your money make you money – and here’s how it’s done: investing.
Yes, you most certainly can beat the market
Yes, I know you may be thinking “how can a guy like me beat the market?”
Well, pretty simply actually. With the average savings account offering around 1-2% interest per year in the UK, it’s actually not as hard as you may think.
(Charter Savings Bank – currently offering 2.7% AER, fixed for five years)
Like anything in life, I opt for simplicity and the most simplistic approach I have found to investing is something called dollar cost averaging.
Minimalism is a tool to rid yourself of life’s excess in favor of focusing on what’s important—so you can find happiness, fulfillment, and freedom. – The Minimalists
It’s a strategy that anyone, anywhere can start. You don’t need any deep understanding of stocks or require a financial advisor. Just yourself, a computer and time (a lot of it!).
You can become a millionaire in your lifetime. However the one fatal flaw of dollar cost averaging is that you do need time on your side. I’m sure this isn’t a problem for you, because if you’re young and in good health, then you’ll be rich in time.
Based on your age, here’s how much you’d need to invest everyday to end up with $1M when you turn 65, if you dollar cost average your way into stocks.
So what exactly is Dollar Cost Averaging?
Dollar cost averaging is consistently transferring an amount of money from your earnings into an investment account every so often (usually weekly or monthly) so it can be put to productive use earning interest. By purchasing equal dollar quantities of stocks, bonds or commodities at regular time intervals, sometimes we buy below the mean, and sometimes we buy above the mean. By consistently adding to your portfolio on a regular schedule, your entry price will ultimately approximate the true mean over time.
You can invest a consistent amount of money into America’s top 500 public companies by putting your money into one single security: an S&P 500 index fund. These index funds can be purchased in any investment account under the ticker symbol SPY or if you are in the UK there are a number of tracker funds such as:
- iShares S&P 500 ETF (LSE: IUSA)
- Vanguard S&P 500 ETF (LSE:VUSA)
- HSBC S&P 500 ETF (LSE:HSPX)
Dollar cost averaging is like steroids for your money. Here is a chart comparing an investment of $500 a month on steroids vs. that same $500 not on steroids:
With steroids, your monthly $500 investment becomes $1.15M over 35 years. Without them, your investment adds up to a miserable $21k.
The bottom line: don’t do steroids. Have your money do steroids.
Dollar cost average into the S&P 500. The difference between doing it and not doing it could be costing you $937k in extra cash.
Invest regularly into the S&P 500 and choose an interval that suits your income and savings schedule and STICK TO IT. By adding to your portfolio at regular time intervals, your entry price approximates the mean of the underlying market.
- Invest every month,
- 3 months,
- 6 months,
- or every 12 months.
With all that said, start investing NOW! The later you leave it, the less interest you will accumulate which will in return impact your future wealth.
Many Happy Investing,