Steve Jobs, founder of Apple Computers, advised people to “Think different.” Those two words of wisdom also apply to investing.
After all, there’s the “old way” and a “new way” to attempt to build wealth.
The “old way?” Ai??You buy your stocks through a broker, paying commissions and fees probably buying with the crowd after prices have risen and then selling after prices started dropping. Ai??Sorry about that!
Mutual funds are also an “old way.” They’re expensive (transfer agent fees, custodial fees, administration fees, registration fees, not to mention front-end or back-end loads). They underperform (of the more than 8,000 funds, fewer than one in 10 beats the S&P 500 in any 10-year period). Ai??And you’ve lost control because you’ve turned over responsibility to others. If other fund shareholders want to pull out when youai??i??d want to be buying, then itai??i??s your tough luck. Management may be forced to sell. And thatai??i??s not to mention taxes on those sales.
And what’s the “new” way? DRIPs, or direct investment plans. Here’s how they work, and why by investing through them youai??i??ll accumulate far greater wealth. Really!
What is a Direct Investment Plan (DRIP)?
Normally, when you invest in a stock, you buy a specific number of shares through a broker. Ai??Indeed, participating in ai???the marketai??? anticipates buying and selling. Ai??But when you come down to itai??i?? buying and selling is really speculating–not investing. Ai??Youai??i??re gambling that prices will rise before you sell.
DRIP investing is different. Ai??DRIPs are plans that provide an efficient way to build up holdings over time. You eliminate the broker and your investment amounts buy shares directly from the company. Ai??By investing over time, you donai??i??t have to guess about when to buy. Whatai??i??s more, such regular (or irregular) investments buy more shares when prices are lower and fewer shares when they are higher. The end result is that YOUR cost per share is even lower than the average price per share during the period you invested.
Ai??How does it work?
You pay a modest one-time fee to get enrolled, and for many great companies you will not pay another dime as you accumulate shares. No fees… no commissions… nothing. Ai??In other words, every dollar you invest goes to buy shares.
This will vastly improve your investment results. You may think that a small brokerage commission is not particularly meaningful. But the culprit is not the fee. The real killer is the opportunity cost of not investing the money youai??i??re spending on fees. That isai??i?? the dividends that would have been paid to your account on the shares those fees would have boughtai??i??and the effect of compounding on those dividends! Even small fees have an overwhelming effect on portfolio performance.
Why save in the bank when DRIPs make it possible to save in stock?
There are about 1,300 companies with DRIPs. Ai??Plans vary by company, but thereai??i??s information about every DRIP at our Website directinvesting.com. You qualify to open a DRIP by becoming an owner of a single share of the company stock. After that, you send money to your account to buy shares. Most plans accept investments of as little as $25 (of course you can invest $1,000s if you have the wherewithal).
With such easy enry, thereai??i??s no reason why you canai??i??t establish accounts in a broadly diversified group of no-fee DRIPs and fund them regularly, building assets over time. This makes equity investing a reasonable option for almost everyone. The problem is that most people donai??i??t know about DRIPs or think they sound too good to be true.
You will receive a statement from the company with a tear-off portion at the bottom to return with your next investment. You can even have them automatically take money from your bank account. Your funds will buy shares based on the market price of the shares on the investment date. (Say you want to invest $100 regularly in Company X. Ai??When itai??i??s selling for $67, you’d get 1.33 shares. When itai??i??s selling for $100 youai??i??d get only one share.)
Thus DRIPs make it easy for you to take advantage of market dipsai??i?? instead of allowing the market to prey on your natural fears, while allowing more logical investors to buy the stocks that you may be rushing to sell. While it’s human nature to try to “beat” the market, it rarely works. DRIP investing can help you win this battle of emotions and much more.