Saturday, October 21st, 2017

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Dollar-Based Investing: What Every Investor Should Know

What is dollar-based investing?

Traditionally, you invest by buying a whole number of shares, and the cost is the number you buy multiplied by the price: ABCD is selling for $20.25 per share. You want to buy ten shares. 10 X $20.25 = $202.50.

With dollar-based investing, you buy stocks or other investments in a dollar amount you choose, instead of in multiples of the stock price. Let’s say you decide to invest $200 a month; your investment doesn’t normally buy an exact whole number of shares. With dollar-based investing, you can purchase the shares of your choice in fractional amounts. It’s a great idea for the average investor who wants to invest consistent amounts for the long term.

How much risk is too much?

Whenever you feel like you’re doing more gambling than investing, the chances are you’re lopsided on the risk side. It’s a subjective call, but if your portfolio is too exposed to risk, you could be in danger of taking some hard hits. When it comes to risk, always weigh the consequences and keep that part of your portfolio in sensible proportion.

In the long run, isn’t diversification overrated?

Short term or long term – stock market sectors go through highs and lows based on any number of variables. The idea is to hold securities that allow you to offset the inevitable downturns in one area (or company) with the upturns of another. Regular rebalancing of your portfolio is essential maintenance. You don’t want to get caught with all your eggs in one basket because diversification cannot ensure a profit or protect against loss in a declining market.

Which investor benefits the most from dollar-cost averaging?

Even the best and brightest financial gurus can fail at timing the market. For most investors a wiser strategy may be to invest a predetermined amount every week or month. The result is "dollar-cost averaging**.’ If a stock rises and falls, you’ll sometimes be "buying high" and sometimes "buying low," relative to a stock’s long-term performance. But it also means that you keep adding to your portfolio in a consistent manner. And in the long term, consistent investing can help you build your portfolio.

**Dollar cost averaging does not assure a profit or guarantee against loss. Investment values vary with stock selection and changing market conditions. Investors should consider their financial ability to continue investing in periods of declining values.

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