Everyone knows the formula for successful investments — buy low, sell high.
So why do so many stock investors get it wrong?
The S&P 500 has gained about 7% a year on average for the last three decades. But retail investors — everyday folks like you and I — are lucky to make 4% in the stock market each year.
And that’s just on average. Hidden within those numbers, people lost their life savings… watching their chances of a dream retirement just disappear
The problem is timing — the widespread belief that it’s easy to know exactly when to get in and out of the market.
Trust me… it’s not easy.
Without a reliable, well-researched system, you’re just guessing. That makes you more likely to buy at the wrong time and sell too soon.
A lack of strategy also makes you more prone to emotional decisions where things are volatile.
You’ll rashly buy because you’re afraid of missing the next upswing — paying too much for a position. And sell when prices turn against you, racking up huge losses.
So today I’d like to give you the antidote for poor market timing. It lets you ignore Wall Street’s ups and downs… reliably growing your wealth over time.
It’s called dollar-cost averaging (DCA). Here’s what you need to know…
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The Volatility Antidote
Dollar-cost averaging (DCA) is simple. You choose a stock, then commit to investing a set amount of money in that stock at a set interval.
For instance, you could choose to buy, say, $1,000 worth of Wells Fargo shares every year. Or $100 worth every week.
(I’m just using Wells Fargo because it’s a well-known company that’s taken investors on a while ride, so don’t consider this an actual recommendation.)
It doesn’t matter how much money you choose, or how often you choose to buy. What’s important is that the interval and the amount of money you put in stays the same, no matter what.
What will likely change is the number of shares you end up buying at each interval.
When prices go up, your money will buy you fewer shares. When prices fall, you’ll get more shares for your money.
Either way, you’re adding to your position every year. And if you choose a dividend-paying stock, you’ll also increase the amount of income you receive every year, too.
You can use that money to buy even more shares of the stock — compounding your income even more!
Before long, your position will be large enough that the ups and downs won’t matter anymore.
In fact, you might actually start looking forward to downswings… because they will give you a chance to make your pile of stock shares even bigger.
Best of all, when it’s finally time to sell your shares, you could end up with much more money than if you had made a big initial purchase or even tried to time the markets.
Let’s take a look at this in action!
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The Power of Dollar-Cost Averaging
Let’s say you decided to initiate a DCA strategy using Wells Fargo in 2008.
You vow to spend $1,000 on WFC shares as soon as the market opens every New Year — no matter what’s happening to the stock or the economy.
On the first business day of 2008, Wells Fargo shares opened for $30.48. Your $1,000 could buy 32 shares at that price. And since the stock paid out $1.30 in dividends that year, you would have earned a total of $41.60 that year.
Then the financial crisis hit… and Wells Fargo shares started dipping.
A lot of people panicked and sold, taking huge losses. Others tried to guess when the stock would hit bottom before buying in again.
But not you. Following your DCA plan, you invest $1,000 in Wells shares the second the market opens in January 2009.
Shares are a little cheaper, plus you can use your dividends to buy shares, too. So you add 35 shares to your position.
You now have a total of 67 shares… and even though the company slashed its dividend that year, you would have received a total of $32.83.
Let’s say you continued the strategy through January 2020. By this time, you have 396 shares of the stock. At its current price, your position is worth $19,200.
Sell your position now, and you’ll bank a 48% return on the $13,000 you’ve invested in the company.
And the best part is, you didn’t have to worry about the financial crisis that started in 2008. And when Wells Fargo was accused of fraud in 2016, you didn’t panic.
Instead, you’ve kept your cool… and come out ahead!
But for dollar cost averaging to work, you need to keep some important things in mind.
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A Long-Term Strategy for Long-Term Profits
For the best results, choose well-known companies that have been around a long time and pay dividends.
You can expect them to keep chugging along, and your annual dividends will increase as you keep picking up shares.
Above all else, this strategy requires discipline. It simply can’t work if you’re not prepared to stick with it for the long-term.
You can’t second-guess your plan. Set up the rules for yourself, then follow them. Don’t be swayed by emotion.
There are only two times you should close the position.
The first is if something fundamental changes at the company. For instance, it suddenly decides to stop paying dividends… or it starts warning investors that it’s on the verge of folding because of bankruptcy.
You can’t make money with a company that will no longer exist.
The second reason to sell is to enjoy some well-deserved profits.
But with a solid DCA plan in place, you can stop worrying about the markets ups and downs. Instead, you’ll focus on building a position that will likely have a big-time payoff down the road.
So why not give it a try?