The maxim that gets passed around on the topic of when to begin investing is “The best time to invest was yesterday, the next best time is today.”
When we are new to investing, we think that there is a “perfect time” to jump into the stock market. In reality, we can wait decades for that perfect moment to arrive.
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Instead of waiting, spread your investments out over time. This method, called “dollar cost averaging,” was coined by Benjamin Graham in his book The Intelligent Investor. With this method, the investor decides how much and how frequently they will buy into their investing portfolio.
By following the dollar cost averaging (DCA) method, the investor spreads their risk out over time, thereby reducing the risk that comes from buying at any one time in the market.
This method is best served by automating your investments so that your emotions around the state of the investment world do not affect your decision to continue with your plan. Another famous maxim in the stock market world is “It’s not about timing the market, it’s about time in the market.”
This is supported by statistics showing that accounts that are well-balanced do best when maintained throughout the highs and lows of the market. Fidelity studied the best performing portfolios over a ten-year period and found that the very best belonged to people who had forgotten they owned a portfolio!
By not allowing your emotions to convince you to sell when the market drops and buy when the market rises, you can retire with significantly more money.
Once you have your portfolio automated and removed from your emotions, you can begin to actively work against your emotions. When the market goes through major drops, our first reaction is to sell our investments in order to recover whatever we can. When the market skyrockets, we try to invest as much as possible to try and catch ahold of the rocket.
Both emotional reactions are the exact opposite of how we should methodically invest our hard-earned money.
When the market drops, instead of seeing it as an emergency moment, see it as the market being “On Sale.” Some of the biggest fortunes were created out of the biggest market crashes. Check out those stories here.
The lesson here is to follow Warren Buffett’s advice and “be fearful when others are greedy, and be greedy when others are fearful.” Warren Buffett himself made billions by buying stocks that had been slashed to pennies during the 2008 financial crisis.
If we mimic the behaviors of the best investors, we can copy their success for our own betterment.
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