It’s the simplest way to start on the path to wealth.
If we invest regularly, we are already wealthy.
Regular Investing Provides Wealth
Putting some dollars every month into our investments means we grow our wealth automatically. Here is why.
Suppose we put $100.00 a month into a dividend-paying stock has an annual yield of 3% (0.75% per quarter). This method is called dollar-cost averaging. At $100.00 per month, after one year we have invested $1,200.00.
When we invest $100.00 monthly, we could have upwards of $22.00 in total dividends of the entire year.
Since we reinvested dividends, our total invested amount after one year (depending on the price of the stock when dividends are issued) could get about $1,222.67: what we invested plus total of all dividends for that year. This calculation does not take into account the actual fluctuations in price, or exact date ownership of stock recorded (the record date) of ownership, for the stock we have purchased, so it is just a theoretical number. But it does illustrate how regular investing can pay off.
In the illustration we see this in action. We invest $100.00 per month, but the dividend is paid quarterly, which means our first quarter investment is $300.00. Our 3% dividend is $2.25. So, going into the second quarter we start with $302.25 invested. Then we add the three months of $100.00 each. So our total investment in the second quarter is $602.25. Our 3% dividend on $602.25 is $4.52. So our total invested by the end of the second quarter is $66.77. With each quarter, our investment grows.
When we look at the end of the year, we see we have put in $1,200.00, plus the total of all dividends ($2.25 + $4.52 + $6.80 + 9.10), for the total figure of $1,222.67.
This means, of course, we start the next year with a base of $1,222.67.
Occasionally financial writers will extoll the benefit of one-time lump-sum investing as opposed to dollar cost averaging. I would guess that most people do not have available a large amount to invest all at once. In my case, it was rare to have large amount to invest at one time. The method I used is what we describe and is called dollar-cost averaging: deducting a stable amount from a paycheck. One of the great things about this is that once it is set up, it happen automatically, monthly.
DCA (dollar cost averaging) also has other benefits. As mentioned, once setup, it happens automatically. In addition, it is easy to not pay attention to it. Which in my view is a great thing. Letting it happen without constant input reduces friction to almost nothing.
Happy News
Many a time I wake up in the morning with an email or text from a transfer agent, sent while I slept, informing me of a purchase shares via my monthly investments.
Warren Buffett is famously quoted as having said: “If you don’t find a way to make money while you sleep, you will work until you die.” I consider monthly automated investments, combined with dividend reinvestment, the best parts of making money while I sleep.
How is your sleep? Let me know here.
The post What’s So Great About Dollar Cost Averaging? appeared first in Smile If You Dare.