Probably the best investment management tool that I use, this tool makes successful investment management a lot easier when investment markets are challenging. With this management tool you can lower your risk and also profit while others pay the price and lose money. Now it’s time to share.
Successful investment management has eluded all but the most experienced investors for the past ten years. Using the best investment tools out there you could have been one of the few to make money investing without breaking a sweat. Here’s an investment tool that would have worked for you, and should continue to do so in the future. It’s called dollar cost averaging, and the best investment vehicle to use here is a diversified stock fund. So, let’s say you want to set aside $5000 a year to earn higher returns, get growth and accumulate money, perhaps in an IRA retirement account. Here’s how it works.
At the same time each year you send $5000 to a diversified stock fund (no-load variety), no matter what the economy or investment markets are doing. Let’s look at an example somewhat similar to the turbulent times we’ve experienced lately in the USA. You’ve made four yearly investments, and are reviewing the results just before laying down your $5000 for year five. The share price of your stock fund when you bought in over the past four years, in order: $10, $8, $5, $8. As you ponder sending in another $5000, your stock fund sits at $10 a share, right where it was when you got started. You can’t make money investing in a market like this you think… until you look at the value of your $20,000 investment. Portafina Website
Using the investment management tool called dollar cost averaging, you bought the following number of shares from year 1 through year 4: 500, 625, 1000, 625. That gives you a total of 2750 fund shares worth $10 each, for a total investment value of $27,500. The value of your stock fund went no where and you are still $7500 ahead. Very simply, our investment management tool forced you to buy more shares when stock prices were lower; and you bought fewer shares when prices were up. The more volatile and uncertain the markets, the better dollar cost averaging works.
Please pay attention to the following. I mentioned earlier that the best investment vehicle to use here to get growth and make money investing is a stock fund of the diversified variety. Do not use this management tool with an individual stock, or do so at your own risk. Why? Because any stock can go down the tubes and leave you holding a bunch of shares worth absolutely nothing. For this to happen to the average diversified stock fund, the good old USA would need to virtually cease to exist as we know it.
No investment management tool provides you with a complete investment strategy. But if you combine proper asset allocation & diversification, plus balance & rebalance to this one, you’ll be hitting on all cylinders. With good investment management in your pocket the sky’s the limit. Please note that our above example does not even consider the added value that reinvested dividends would have added.
A retired financial planner, James Leitz has an MBA (finance) and 35 years of investing experience. For 20 years he advised individual investors, working directly with them helping them to reach their financial goals.