2. Invest Regularly (Dollar Cost Averaging)
“Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it.”-Warren Buffett
How much should I invest
People are afraid of the word “investing” they think investing requires some sort of sophistication. Most advisors will focus on the amount of savings required to keep your standard of living at retirement. Reality is you have to start with a savings habit and for that it just takes the effort to have an account open and you can start automatically contributing as little as $50 per month or ideally the amount (D) from the “How to get there from here (Spend less than you earn)” section.
Dollar-cost averaging means investing a certain fixed amount at regular intervals, regardless of what's happening in the stock market. This way you buy “extra” units when the market is low and fewer units when prices are high. By doing that, the price you pay will typically results in a lower ACB (Average Cost Base) over time than if you had made one lump sum purchase.
No one has yet discovered any other formula for investing which can be used with so much confidence of ultimate success, regardless of what happened to the security price, as Dollar Cost Averaging.
Over time, as the market rises again, those "extra" shares bought in a down market can dramatically increase the value of your investment.
Example & Explanation: Let's assume you have a stock that pays 3% dividend and you re-invest $6000 ($500*12 years) each year for 5 years, at THE END of each year you will have:
1st year = $6000*3% = 180 interest, balance = $6180
2nd year = $6180*3% = 185.4 interest, balance = $6365.4
3rd year = $6365.4*3% = 190.96 interest, balance = $6556.36
4th year = $6556.36*3% = 196.69 interest, balance = $6753.05
5th year = $6753.05*3% = 202.59 interest, balance = $6955.64
Now if this same stock fluctuates over time the additional cost averaging effect will add to your wealth:
1st month = $500 buys 71.43 shares at $7, balance = $500 (71.43shares*$7)
2nd month = $500 buys 100 shares at $5, balance = $857.14 (171.43shares*$5)
3rd month = $500 buys 166.67 shares at $3, balance = $1014.29 (338.1shares*$3)
4th month = $500 buys 250 shares at $2, balance = $1176.19 (588.1shares*$2)
5th month = $500 buys 100 shares at $5, balance = $3440.48 (688.1shares*$5)
6th month = $500 buys 71.43 shares at $7, balance = $5316.67 (759.52shares*$7)
Calculations link (Excel spreadsheet)
How to get there from here (Invest Regularly):
Depending on your paycheck schedule, monthly, semi-monthly or bi-weekly, an easy way to Invest Regularly is to setup a PAC (Pre-Authorized Contribution) to mutual fund investment or an automatic EFT (Electronic Fund Transfer) to a self-directed investment account.
___ If you decide to open an investment account at your branch, request to setup a monthly, semi-monthly or bi-weekly PAC (Pre-Authorized Contribution) to a mutual fund of your choice for the amount (E) from the “How to get there from here (Spend less than you earn)” section.
___ If you decide to open a self-directed/discount investment account online, setup a monthly, semi-monthly or bi-weekly automatic EFT (Electronic Fund Transfer) to your brokerage account for the amount (E) from the “How to get there from here (Spend less than you earn)” section.
___ but before opening an investment account or starting invest in anything specific regularly, keep reading the Investment Principles section for more details.