4 ms·

I heard that the strategy of investing the same amount of money every month ("stock goes up, good, stock goes down, you just bought more shares, good") is not a

by vlad 18y ago

I heard that the strategy of investing the same amount of money every month ("stock goes up, good, stock goes down, you just bought more shares, good") is not actually a very good strategy at all. Supposedly, brokers use it to get you to spend money with them on a regular basis, especially if the fund or broker makes commission or a fee per trade.

ced 18y ago
How could it possibly be a good strategy?
- misterbwong 18y ago
  The line of thinking is that you spend the same amount of money every month buying the same stock/investment. Since you're making multiple purchases, you are reducing the risk of a steep drop off in your stock since the price paid for all your investments will be averaged over a period of time. I've also heard that there are no significant benefits to this strategy, although I haven't done very much research on it.
- charlesju 18y ago
  It's all about risk minimization. Assume for a second that you don't read the news and all you see are numbers. (This kind of scenario is kind fairly accurate for most investors because most investors don't beat the index, so they might as well be news agnostic anyways.) Right now, in our hypothetical, you want to invest in the market. You saw that it fell 30 odd % since the top and that if you compare that % to previous great depressions and recessions, it's on par with the bottom of those analogous situations. If you buy in at one single point, you have a high risk that the stock market will drop and you'll lose a lot of money. But if you averaged in, you'll minimize the risk of catching the exact bottom of the stock market, and overall, should increase the average buy-in price. The main reason why this works as opposed to just reading the news and choosing based on logic is because more than 50% of professional investors fail to out-invest the index. That means that you have a much better chance of catching the lowest buy-in to the stock market than if you were to use "logic". It's pretty counter-intuitive, but it makes sense if you just come to the realization that we're not that good investing.
stcredzero 18y ago
I think it's called "Dollar Cost Averaging." One trade a month, especially with a discount broker, is not going to break your bank. It also has the advantage of not being subject to your emotions, and emotions are responsible for untold billions of investor losses.

by vlad 18y ago

ced 18y ago

How could it possibly be a good strategy?

misterbwong 18y ago
The line of thinking is that you spend the same amount of money every month buying the same stock/investment. Since you're making multiple purchases, you are reducing the risk of a steep drop off in your stock since the price paid for all your investments will be averaged over a period of time. I've also heard that there are no significant benefits to this strategy, although I haven't done very much research on it.
charlesju 18y ago
It's all about risk minimization. Assume for a second that you don't read the news and all you see are numbers. (This kind of scenario is kind fairly accurate for most investors because most investors don't beat the index, so they might as well be news agnostic anyways.) Right now, in our hypothetical, you want to invest in the market. You saw that it fell 30 odd % since the top and that if you compare that % to previous great depressions and recessions, it's on par with the bottom of those analogous situations. If you buy in at one single point, you have a high risk that the stock market will drop and you'll lose a lot of money. But if you averaged in, you'll minimize the risk of catching the exact bottom of the stock market, and overall, should increase the average buy-in price. The main reason why this works as opposed to just reading the news and choosing based on logic is because more than 50% of professional investors fail to out-invest the index. That means that you have a much better chance of catching the lowest buy-in to the stock market than if you were to use "logic". It's pretty counter-intuitive, but it makes sense if you just come to the realization that we're not that good investing.

stcredzero 18y ago

I think it's called "Dollar Cost Averaging." One trade a month, especially with a discount broker, is not going to break your bank. It also has the advantage of not being subject to your emotions, and emotions are responsible for untold billions of investor losses.