A great way to avoid stock market ruin …

 

As part of our Italian vacation, my family and I visited the ancient Greek ruins of Agrigento, Sicily. And even as we approached the “Vallei dei Templi” from the road, I was struck by the stark contrast of the famous Temple of Concordia, set on top of a large hill, against the backdrop of a fairly modern town farther off in the distance.

Needless to say, the fairly-well-preserved structure (approximately 2,500 years old) was even more impressive up close … as were many of the other nearby sites.

The more I thought about Greece’s current problems, the more I drew parallels between ancient times and today, too.

But rather than break into a recitation of Ozymandias — as great and true as that poem’s sentiment is — I’d like to use my little journey to Agrigento to inspire a slightly different talk today.

It starts with an important question that I’m often asked …

How Can Investors Continue to Participate in this Crazy Market
Without Getting Ruined by All the Massive Price Swings?

The day I was packing my bags for vacation it looked like the market would be down even further by the time I got back. But instead, it rallied sharply the whole time I was away … surprising plenty of investors, both amateur and professional.

While I’d love to say taking another immediate vacation would help make us all a lot more money, I think the truth of the matter is that quick and violent about-faces have just become the norm in these turbulent times.

For anyone trying to actively trade these markets — or even simply put some new money to work — that can prove exasperating.

However, I would like to remind you that you don’t have to cash in your chips and go home or fail to invest money you might be setting aside. Nor do you need perfect timing.

Instead, you can let dollar-cost averaging work to your advantage!

In case you’ve missed my past columns on this approach, let me explain it once more:

The idea with dollar-cost averaging is relatively simple: You buy equal dollar amounts of the same investment on a predetermined schedule.

Please note the italics in that last sentence. Dollar-cost averaging IS NOT buying a fixed number of shares on a regular basis. In fact, it is quite the opposite. Here’s why …

Let’s say you’ve decided to invest $10,000 in XYZ Corp. Rather than deploying the entire amount at one time, you might instead opt to purchase $1,000 of XYZ stock on the first day of each of the next 10 months.

What’s the logic behind this approach? Well, you can expect just about any stock’s price to vary substantially over a ten-month period. So, when the price is higher, your $1,000 will buy fewer shares; when the price dips, your $1,000 will buy more shares.

In other words, buying equal dollar amounts over time allows you to reduce your risk to a stock’s short-term price movements, automatically encouraging you to buy more when prices are lower and less when prices are higher.

It also removes much of the emotion from the investing process. You’ve already committed to buying the stock at regular intervals, regardless of market conditions.

And because you’re doing this automatically, it doesn’t require more than a few minutes of your time (if any at all).

Okay, Now Here’s Something I Have Failed to Emphasize in the Past …

While I have previously made plenty of compelling arguments in favor of using dollar-cost averaging for stocks … through retirement plans … and even with broad stock index funds, I have never really pointed out that you can ALSO use it with just about any other type of investments these days.

Reason: Dollar-cost averaging can be done with practically any exchange-traded fund out there — and as many of my colleagues have also regularly pointed out, ETFs now cover gold, silver, oil, and various flavors of bonds.

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This is especially important because it’s not just stocks that have been experiencing wild swings in price!

In other words, my goal with all these dollar-cost averaging endorsements is not to convince you that you must invest in stocks no matter what (though I do believe nearly every investor should have some allocation to this asset class).

Instead, it’s to show you a way of methodically buying whatever particular investment you believe will rise over the long-term.

And while dollar-cost averaging is truly a long-term strategy, you don’t have to stick with it for 2,500 years to see great results!

So, please, if all the choppy action in the markets has been discouraging you from sticking with your big-picture investing plans … consider getting back in the game bit by bit with this oft-ignored but extremely powerful strategy.

Best wishes,

Nilus

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