The Only “Back to Basics” Technique That Has NEVER Failed to Line Up Big Profit Potential
Worried about coronavirus chaos?
You’re not alone. In fact, there are millions of investors in your corner.
I cannot recall a scarier set of circumstances in the 37 years I’ve been active in global markets.
You’re being bombarded with scary headlines, crazy conspiracy theories, and a sea of red ink from people keen to sell you the next hot stocks. It’s a media blitz of unprecedented equal.
Thing is… doom is never the answer.
Getting back to basics is.
That’s why I want to share the only “back to basics” technique I know of that’s never failed to produce huge profits over time.
I thought you might be.
Millions of investors are shaking in their boots because fears of a market crash have them scared silly.
I’m actually licking my lips.
Big down days always create opportunity. Not sometimes, not at a few select moments, not once in a while… always.
Knowing how to harness the upside automatically is key.
Many investors think they have to be stuck to their screens or smartphones all day so that they can catch the squiggles, niggles, and zig zags that many are convinced lead to big profits.
Today I want to share a Total Wealth Tactic that can help you build bigger profits faster and, best of all, automatically. No screen time, no missed trades, no slapping yourself in the forehead because you took your eyes off your things for an instant.
It’s called “dollar cost averaging,” and ANYONE can do it.
Young or old, rich or poor, just starting out or looking maximize your holdings and finish rich, YOU can do this.
Dollar cost averaging simply means that you buy into stocks and other investments by spreading out your money over time… days, weeks, months, even once a year… rather than diving in all at once.
[CRITICAL] A $100 Investment Could Mean 10X Returns
The time frame really doesn’t matter too much.
- Dollar cost averaging helps you “buy the dips” on big down days when other investors are too scared to buy.
- Dollar cost averaging also helps you avoid piling in all at once when prices are high and doing so is extraordinarily risky.
This is a very important concept right now.
Because “dollar cost averaging” will help you score the biggest “deals” and line up huge profit potential that is practically immune to short-term fears… and longer term pullbacks, if that’s what is keeping you up at night.
It’s a big part of being “in to win,” something you hear me talk about often.
How It Works
This is an especially good tactic to use on stocks you might otherwise think are “too expensive” for your retirement account – think Apple Inc. (NasdaqGS:AAPL), Alphabet Inc. (NasdaqGS:GOOGL), and Amazon.com Inc. (NasdaqGS:AMZN),
Imagine you automatically send $300 each month toward a stock, let’s call it XYZ, for your retirement fund. It’s January and shares of the stock are trading at $50 per share. Your automatic purchase of $300 worth translates into six shares:
$300 ÷ $50.00 = 6 Shares
In February, perhaps there is a health scare in China that drives the stock down to $30. But, in sticking to your disciplined approach, you still devote $300 as planned. This time, your automatic $300 purchase translates into ten shares:
$300 ÷ $30.00 = 10 Shares
The following month, it trades at $46.15. You automatically devote another $300 and purchase 6.5 shares:
$300 ÷ $46.15 = 6.5 Shares
By April, let’s say that there’s a rally and the stock hits $54.50 per share. You automatically pick up another 5.5 shares:
$300 ÷ $54.50 = 5.5 Shares
After your April purchase, you’re sitting on 28 shares for an average buying price of $42.85 per share. In total, you spent $1,200 ($300×4).
Now, consider if you had instead spent all that $1,200 in one go back in April.
$1,200 total investment ÷ $50.00 per share = 24 Shares
What I like about dollar-cost averaging it that it helps keep risks low yet returns high, because it prevents you from investing a single large amount at the wrong time… like now, for example, if you’re worried about the coronavirus and all the implications that come with it.
I’m also a big fan of the discipline dollar-cost averaging instills because it takes emotion out of the equation.
And finally, dollar-cost averaging forces you to buy more shares when prices are low which means that your “cost basis” – a fancy way of saying your total cost – actually drops and that, in turn, means you have that much more profit potential!
Here’s an example…
Imagine investing $10,000 into Apple Inc. (NasdaqGS:AAPL) in September 2008.
You’d be sitting on 421 shares worth only $5,313 as of March, 3, 2009, when people thought the end of the financial universe was upon us.
Had you dollar-cost averaged in for three months, starting that same September, though, your holdings would be sitting on 581 shares worth $7,333 on the same day. Both are losses, and that’s no fun.
Here’s where it gets interesting, potentially very profitable and why I think so powerful.
Apple would have to rise only $4 per share for you to break even, if you’d dollar-cost averaged in, versus needing gains of $11 per share for you to break even if you went all in.
More to the point, 12 months later you’d be sitting on profits of 37.98% because of dollar-cost averaging versus barely breaking even had you invested all at once.
I think that’s a powerful and very compelling performance advantage that capitalizes on your skepticism yet keeps you in the game…
…even if stocks still have a ways to go before they find another bottom.
That’s not even the good stuff!
Value Averaging is a closely related cousin (and even more powerful over time)
Value averaging is a little different. Not many investors know about it which is too bad considering how valuable – pun absolutely intended – this Total Wealth Tactic is.
Dollar-cost averaging would have you invest $300 a month, but you might prefer to grow your portfolio by a fixed amount every month.
For discussion purposes, let’s assume that you want to make your portfolio grow by $300 a month – every month.
In some months, you’d invest $300 just as with dollar-cost averaging. However, if the $300 you contributed last month lost a bit of ground and is now only worth $290, you’d contribute $310 next month to make up the difference.
In the months where you’ve made more than your target, you’d have the option not to contribute anything at all.
This simple twist first proposed by its creator, former Nasdaq Chief Economist and Harvard Business School Professor Michael E. Edleson, has been shown to produce better results over time than the conventional dollar-cost averaging method.
Edleson, who is now the Chief Risk Officer for the University of Chicago’s endowment, relied on one crucial piece of information that was missing from the dollar-cost averaging method to come up with “value averaging.” By considering a portfolio’s expected rate of return (something that the dollar-cost averaging method neglects), the “value averaging” method helps to identify periods of over- and underperformance.
When the portfolio is underperforming, share prices are likely to be low. And that’s when you’ll be investing more to make up for the underperformance. When the portfolio is outperforming your target-rate return, share prices are likely to be high. That means it is not a good time to buy and you could even sell for a profit, provided you maintain your predetermined average growth rate.
In closing, people often talk about the importance of “buying low and selling high,” but I don’t think that’s quite right.
What you really want to be doing is buying lower and selling higher. Dollar cost averaging and value cost averaging help you do that.
Until next time,