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The Budget Tip of the Day
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-------The Budget Tip Archive------- |
Get It Here
Today's Tip: Don't Time the Stock Market
I'm going to start off this article by giving you a couple of old adages. First, "If it was
easy to do, everybody would be doing it." Second, "if it sounds too good to be true, it
probably is." Timing the stock market is the essence of hindsight being 20/20 (okay, a third
night television ad tell you just how easy it is to make money in the stock market. But
timing the stock market can be dangerous, and I will provide an alternative which can save
you time, headaches, and when you think about it....it actually makes sense.
The main alternative to market timing is Dollar Cost Averaging, a strategy which reduces
market risk through the systematic purchase of securities at predetermined time periods and
set amounts. For example, if an individual invests $100 at the end of every month in the
same mutual fund, this investor would be utilizing the technique of dollar cost averaging.
By controlling the variables of time and cost, an investor is able to spread out his/her risk
over a longer period of time. See the chart below which compares a one-time investment
to a gradual investment from an investor who utilizes dollar cost averaging:
Remember that any investment involves risk. Undoubtedly you are aware of the
risk/reward principle. If you don't have the stomach for the risk, don't make the
investment. However, if you are a cautious investor who wants to get into the stock
market, dollar cost averaging is a great way to mitigate risk.
To come back to the market timing principle, simply ask yourself, "Am I an investment
professional? Do I get paid to make investment decisions?" If the answer to those
questions is no, then why are you trying to time the market? Perhaps you would have
better luck picking the colors of the roulette wheel!
If you still need more proof, do you need to look any further than the dot com bubble of the
late 1990s?
Have you downloaded the free budget yet? Our free budget spreadsheet is updated for
2008 and features a monthly account tracker and budget form!
I'm going to start off this article by giving you a couple of old adages. First, "If it was
easy to do, everybody would be doing it." Second, "if it sounds too good to be true, it
probably is." Timing the stock market is the essence of hindsight being 20/20 (okay, a third
night television ad tell you just how easy it is to make money in the stock market. But
timing the stock market can be dangerous, and I will provide an alternative which can save
you time, headaches, and when you think about it....it actually makes sense.
The main alternative to market timing is Dollar Cost Averaging, a strategy which reduces
market risk through the systematic purchase of securities at predetermined time periods and
set amounts. For example, if an individual invests $100 at the end of every month in the
same mutual fund, this investor would be utilizing the technique of dollar cost averaging.
By controlling the variables of time and cost, an investor is able to spread out his/her risk
over a longer period of time. See the chart below which compares a one-time investment
to a gradual investment from an investor who utilizes dollar cost averaging:
Remember that any investment involves risk. Undoubtedly you are aware of the
risk/reward principle. If you don't have the stomach for the risk, don't make the
investment. However, if you are a cautious investor who wants to get into the stock
market, dollar cost averaging is a great way to mitigate risk.
To come back to the market timing principle, simply ask yourself, "Am I an investment
professional? Do I get paid to make investment decisions?" If the answer to those
questions is no, then why are you trying to time the market? Perhaps you would have
better luck picking the colors of the roulette wheel!
If you still need more proof, do you need to look any further than the dot com bubble of the
late 1990s?
Have you downloaded the free budget yet? Our free budget spreadsheet is updated for
2008 and features a monthly account tracker and budget form!
Monday, December 10, 2007
Free Budget Spreadsheet