There are a number of investment strategies that the everyday person can easily take advantage of but many don’t. They are super easy to implement and over the long hall can make a huge difference! Let’s check them out:
Dollar Cost Averaging
This one is super simple. Invest on a schedule. The banks make it super simple to take advantage of by setting up automatic withdrawal. Have the bank withdraw a predetermined amount off your paycheck and invest it in whatever stock, bond, fund, etc. you have invested in.
Why is this important? Because you take advantage of dollar cost averaging. The theory behind this one is simple. Buy more when prices are low and less when prices are high. This results in a solid investment plan that lowers your costs of ownership.
Say you buy $100 worth of a fund every 2 weeks. Your first transaction is 2 units at a cost of $100. 2 weeks pass and your fund has increased $100/unit so you purchase 1 until. Next 2 weeks you it has decreased to $25 per unit. You purchase 4 units. Two weeks after that the price has increased back to the original $50/unit and you decide to sell. You sell your 7 units for a $50 profit.
In this case the price changed equally in magnitude and when you sell it is at the original purchase price. Dollar cost averaging allowed you to earn a profit where intuitively you would have though you broke even.
Most funds have rebalancing built in. Why? Because it’s a good strategy. However, buying funds that do this for you is expensive. It’s really easy to do yourself so take advantage and save yourself a lot of money.
When you initially purchase your funds take note of the ideal asset mix you have selected. Every 3 or 4 months rebalance. All rebalancing is adjusting your asset mix back to your ideal ratio.
There are two main reasons to do this based on financial concepts.
The first has to do with your expected return and risk that goes along with that. When you create your ideal asset mix, it all has to do with the risk and return you are comfortable with. As different assets within your portfolio earn different returns, your asset percentages become different. This changes the expected risk and return of your portfolio and gets away from your ideal portfolio. Either you’ll be leaving potential return on the table or end up with a portfolio that is too risky based on your risk level. Both are not good and one reason rebalancing is important!
The second plays off the first concept, taking it to an extreme. Market crashes do happen. They happen because assets become overvalued and return to what their true price is. The key concept is that they are overvalued. In rebalancing, you sell assets that increase a lot in value to return to your ideal percentage. It reduces your exporsure to the asset price crashing by forcing you to sell.