Investing 101
Dollar Cost Averaging
The basic principle behind Dollar Cost Averaging is very simple. Your money buys more stock, bonds or mutual funds when prices are low and less when prices are high. This technique is best suited to medium to long term investments where over time your consistent investment should lead to an average price better than trying to time the market where you may be lucky to buy at the bottom or unlucky to buy at the top of the market cycle. Please remember that Dollar Cost Averaging does not guarantee you a profit. It simply provides you with a secure method of providing the “best” median base line in the cost of your investment. It will of course also require that you keep detailed records to establish the cost basis of your investments but this small amount of extra effort is definitely worth the results achieved over time.
Dollar cost averaging also removes the emotion from investing. You decide up front how much you can or wish to contribute and put this predetermined amount away each month or quarter. One additional benefit of dollar cost averaging is that it tends to cut down on unnecessary trading and the potential resultant capital gains tax.
If you historically reinvest your dividends then you are already performing a form of dollar cost averaging. Be careful not to become excessively focused on dollar cost averaging. It is a tool and nothing more. A good tool but still a financial tool. Do not commit too much of your income towards dollar cost averaging investing after maximizing your 401(k) or IRA. You do after all need a little flexibility to reward yourself and those you love from time to time.
One thing to remember if you Dollar Cost Average via a DRIP you will need to keep track of your “cost basis”. This term simply means the price you paid for each portion/unit of stock or mutual fund you purchased. You will need this to calculate the profit or loss you will have when you decide to sell. Who needs to know this? Two people, the taxman and yourself though for different reasons. Remember you must always give unto Caesar that which belongs to Caesar. You also need to know your true profit to be able to bring your tithe into the storehouse of God.
Of course if you are making monthly deposits into a savings or money market account then we do not use the term dollar-cost-averaging as you are basically accumulating capital.
Index funds
These buy a basket of stocks based on some selected financial index. Though some may from time to time hold portions in cash equivalent holdings or even futures contracts, options or swaps related to the underlying index so it is important to read the funds prospectus. Indexing may help you to eliminate some of the risks associated with active trading or active management such as poor timing or poor security selection. Indexing may also help increase your after-tax performance by keeping portfolio turnover low in comparison to actively managed investment funds.
The goal of an index fund is not necessarily to beat the market but to meet the same market performance as the selected index. Please remember that this is generally before management fees and expenses so it is vital to pick a fund with a good track record of low management fees and expenses such as Vanguard or Fidelity.
An index fund like an actively managed fund carries with it a varying amount of risk and this is related to the overall market, the strategy of the fund and the management of the fund itself. Remember that the fund manager’s track record is very important so if he or she leaves the fund you should watch the funds performance and if it drops you may wish to consider leaving too.
Some index funds may use the term “representative sampling” this is investing in a representative sample of securities in the relevant underlying index, which have a similar investment profile as the underlying index. Securities selected have aggregate investment characteristics and fundamental characteristics plus the liquidity measure of the underlying index but do not hold all of the securities that are included in the relevant underlying index. Thus we see a variance in performance called tracking error. This may result in lower returns than the actual index itself. Again please remember to read the funds prospectus.
Let us look at market risks. Every stock or mutual fund is subject to market risk. We will discuss mutual funds in more detail a little later. Depending on the security you select it will be subject to asset class risk, passive investment risk, concentration risk, tracking error risk, management risk, derivative risks and currency risks if foreign currency transactions or comparisons are involved.
All investments may lose money over the short term due to market movements or over the long term due to market downturns. For this reason you should never fall in love with an individual stock or fund but set both buy and sell limits when considering your purchase.
What does the bible say about risk?
Cast your bread upon the water for you will find it after many days. Give a portion to seven, or even to eight.
Ecclesiastics 11:1-2
In the morning sow your seed, and at evening withhold not your hand; for you do not know which will prosper, this or that, or whether both alike will be good.
Ecclesiastics 11:6
The bible instructs us to diversify our investments because you do not which will be successful. Hence the statement we find on every mutual fund prospectus about past performance or earnings being no guarantee of future profits. If any one tells you that they can double your money and make you rich – run and take your money with you. If you want safety then do as the Lord instructed and put your money on deposit for interest.
Each person though as a good steward should learn how to handle the talents allotted to them. It is up to you to ensure that your 2/10 or 1/5 is working all the time so that the harvest is constantly increasing as is your tithe and first fruits to the Lord. If you do not take care of your money others will do it for you, but you will find either it is all gone or greatly diluted. It is your duty to be a good steward and manage your money.
So what is the first step towards taking care of and investing your money after you are out of debt? First save a portion in cash on deposit for interest as stated in the scripture above. It is through the power of compound interest that money on deposit grows and the sooner in life that you remove debt and start to save the more you will have to spend, tithe, and share. However always remember to help others especially the poor or those in need. We spend a lot of time learning about so many different things in school but we have to teach our children and ourselves about managing money and proper diversification.
The basic principle behind Dollar Cost Averaging is very simple. Your money buys more stock, bonds or mutual funds when prices are low and less when prices are high. This technique is best suited to medium to long term investments where over time your consistent investment should lead to an average price better than trying to time the market where you may be lucky to buy at the bottom or unlucky to buy at the top of the market cycle. Please remember that Dollar Cost Averaging does not guarantee you a profit. It simply provides you with a secure method of providing the “best” median base line in the cost of your investment. It will of course also require that you keep detailed records to establish the cost basis of your investments but this small amount of extra effort is definitely worth the results achieved over time.
Dollar cost averaging also removes the emotion from investing. You decide up front how much you can or wish to contribute and put this predetermined amount away each month or quarter. One additional benefit of dollar cost averaging is that it tends to cut down on unnecessary trading and the potential resultant capital gains tax.
If you historically reinvest your dividends then you are already performing a form of dollar cost averaging. Be careful not to become excessively focused on dollar cost averaging. It is a tool and nothing more. A good tool but still a financial tool. Do not commit too much of your income towards dollar cost averaging investing after maximizing your 401(k) or IRA. You do after all need a little flexibility to reward yourself and those you love from time to time.
One thing to remember if you Dollar Cost Average via a DRIP you will need to keep track of your “cost basis”. This term simply means the price you paid for each portion/unit of stock or mutual fund you purchased. You will need this to calculate the profit or loss you will have when you decide to sell. Who needs to know this? Two people, the taxman and yourself though for different reasons. Remember you must always give unto Caesar that which belongs to Caesar. You also need to know your true profit to be able to bring your tithe into the storehouse of God.
Of course if you are making monthly deposits into a savings or money market account then we do not use the term dollar-cost-averaging as you are basically accumulating capital.
Index funds
These buy a basket of stocks based on some selected financial index. Though some may from time to time hold portions in cash equivalent holdings or even futures contracts, options or swaps related to the underlying index so it is important to read the funds prospectus. Indexing may help you to eliminate some of the risks associated with active trading or active management such as poor timing or poor security selection. Indexing may also help increase your after-tax performance by keeping portfolio turnover low in comparison to actively managed investment funds.
The goal of an index fund is not necessarily to beat the market but to meet the same market performance as the selected index. Please remember that this is generally before management fees and expenses so it is vital to pick a fund with a good track record of low management fees and expenses such as Vanguard or Fidelity.
An index fund like an actively managed fund carries with it a varying amount of risk and this is related to the overall market, the strategy of the fund and the management of the fund itself. Remember that the fund manager’s track record is very important so if he or she leaves the fund you should watch the funds performance and if it drops you may wish to consider leaving too.
Some index funds may use the term “representative sampling” this is investing in a representative sample of securities in the relevant underlying index, which have a similar investment profile as the underlying index. Securities selected have aggregate investment characteristics and fundamental characteristics plus the liquidity measure of the underlying index but do not hold all of the securities that are included in the relevant underlying index. Thus we see a variance in performance called tracking error. This may result in lower returns than the actual index itself. Again please remember to read the funds prospectus.
Let us look at market risks. Every stock or mutual fund is subject to market risk. We will discuss mutual funds in more detail a little later. Depending on the security you select it will be subject to asset class risk, passive investment risk, concentration risk, tracking error risk, management risk, derivative risks and currency risks if foreign currency transactions or comparisons are involved.
All investments may lose money over the short term due to market movements or over the long term due to market downturns. For this reason you should never fall in love with an individual stock or fund but set both buy and sell limits when considering your purchase.
What does the bible say about risk?
Cast your bread upon the water for you will find it after many days. Give a portion to seven, or even to eight.
Ecclesiastics 11:1-2
In the morning sow your seed, and at evening withhold not your hand; for you do not know which will prosper, this or that, or whether both alike will be good.
Ecclesiastics 11:6
The bible instructs us to diversify our investments because you do not which will be successful. Hence the statement we find on every mutual fund prospectus about past performance or earnings being no guarantee of future profits. If any one tells you that they can double your money and make you rich – run and take your money with you. If you want safety then do as the Lord instructed and put your money on deposit for interest.
Each person though as a good steward should learn how to handle the talents allotted to them. It is up to you to ensure that your 2/10 or 1/5 is working all the time so that the harvest is constantly increasing as is your tithe and first fruits to the Lord. If you do not take care of your money others will do it for you, but you will find either it is all gone or greatly diluted. It is your duty to be a good steward and manage your money.
So what is the first step towards taking care of and investing your money after you are out of debt? First save a portion in cash on deposit for interest as stated in the scripture above. It is through the power of compound interest that money on deposit grows and the sooner in life that you remove debt and start to save the more you will have to spend, tithe, and share. However always remember to help others especially the poor or those in need. We spend a lot of time learning about so many different things in school but we have to teach our children and ourselves about managing money and proper diversification.
posted by Wisdom at 6:58 PM
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