Market timers generally don’t do well. They pay commissions and taxes and even if they are lucky enough to be right more times than they are wrong, after awhile they’ll notice that they haven’t made much headway toward their long-term goals.
Yet most people follow that path. The conventional wisdom is that if you can only find the right (or the best) financial advisor, one whose buy and sell suggestions you can trust, you can expect outstanding results. From our experience, it’s more likely that you will be disappointed.
In fact, the small investor, acting on his or her own, has as good as or an even better chance to succeed. Nevertheless, most people leave the responsibility for investing to professionals—stockbrokers or mutual fund managers–even if it’s widely known that the professionals tend to underperform the market as a whole (based on research from McGraw Hill Financial, Standard & Poor’s, and many other responsible sources).
Why do we do that? Stock market investing involves a lot of uncertainty and people really don’t like uncertainty. When you work hard for your money, you hate to see it become worth less. That’s why people pull out at the first sign of a loss–reacting emotionally to any drops in the market.
But maybe they should have been buying instead of selling. Waiting on the sidelines has not proved to be a successful strategy for building wealth or securing a comfortable retirement. On the other hand, the stock of U.S. companies as a whole have produced inflation-beating results over the long term.
Our mission, then, is to provide some certainty to your stock market investing and show you how to reduce the risk of failing.
The answer is simple. We suggest that you adopt a “scientific” approach to investing by using no-fee dividend reinvestment plans (DRIPs)–to build up holdings in a diversified group of dividend-paying U.S. companies over a period of years. Our “science” relies in part on the long-term results achieved by the market as a whole.
While investors tend to lose money by going into and out of the market, the market as a whole tends to move in a broadly upward direction. That’s not to say that there are not many times when it drops precipitously.
In fact, the volume of transactions increases at market bottoms. But DRIP investors avoid that angst. Market drops are seen as an advantage in that their regular investment amounts will purchase more shares than before the drop.
The beauty of DRIP investing is its simplicity. You get enrolled in a DRIP or really a group of DRIPs. After that you build up holdings by making regular investments on a monthly or quarterly basis and having your dividends reinvested. After awhile (depending on how much you invest each time), your dividends alone will continue to build your positions.
By following this process, your regular investments will buy more shares when the price of the stock is lower and fewer shares when the price is relatively high. This strategy is called dollar-cost-averaging. It’s a strategy that is widely followed by many of the most successful investors.
These investors make a commitment to a company at what they believe is a fair price and if and when the price drops, they will “average-down.” They can afford to do that because they have money on the sidelines. Smaller investors use a similar strategy to build up their holding in a company (or a group of companies) over time.
By following a dollar-cost averaging strategy, investing the same amount of money on a regular basis you are virtually “forced” to pay even less for the stocks you buy than the average price the stocks were selling for during the period you were building up your holdings. How’s that for certainty! And isn’t that your goal as an investor?
Regardless of how confident you are that a company is a good buy, there is no certainty that the stock will actually move in the direction you desire. You may fear jumping in at what might be the wrong time.
Yet stock investing has produced better long-term results than any other asset class. That has been true throughout history—despite wars, depression, recession, inflation, runaway budget deficits, 20% interest rates, and other disasters. It is likely to survive even a Trump presidency!
The DRIP-in strategy removes the need to make decisions. No matter if a short-term occurrence causes your stock price to plummet or to advance sharply, you just continue to send your pre-determined investment amount.
In fact, if the company DRIP offers automatic investing–where the company follows your instructions and withdraws from you checking account regularly to fund your DRIP account—it makes sense to take that option. That way, you can “set and forget” and anticipate that substantial holdings will accumulate over the long-term.
DRIP investing does not try to outguess the market. The market is capricious and often acts to fool the most people. Your job is to simply keep investing the same amount regardless of the market price.
By “saving” in this manner in dividend paying stocks, your regular cash investments and your dividend reinvestments will be buying most shares when the stock price is favorable. Over the long term, you can expect an average annual return that will approximate 10%.
The effect of compounding–at rates of return that we can expect over the long-term–are almost certain to produce outstanding positive results.
As an example, if you were to fund a portfolio with $5,500 a year for 10 years (a total of $55,000), at the end of 10 years, you would probably have a portfolio worth about $86,000.
That’s not bad because the $55,000 was not invested for the entire period. Only about $27,500 was invested for the entire period. (In the first year, only $5,500 was invested and in the second, only $11,000, etc. so on average only $27,500 was invested for the full 10-year period.)
Now let’s see what happens if you leave that investment in play for a truly long term. Let’s say you leave that $86,000 portfolio in place, without investing another cent except for the dividends thrown off by the portfolio. After another 30 years, at a 10% average annual growth rate, the portfolio is likely to be worth $2,405,933!
Until Next Time,
Ms. Vita Nelson is one of the earliest proponents of Dividend Reinvestment Plans (DRIPs) and a knowledgeable authority on the operations of these plans. She provides financial information centered around DRIP investing. She is the Editor and Publisher of Moneypaper’s Guide to Direct Investment Plans, Chairman of the Board of Temper of the Times Investor Service, Inc. (a DRIP enrollment service), and co-manager of the MP 63 Fund (DRIPX).