antipaucity

fighting the lack of good ideas

three keys to success, from travis chappell

invest your time wisely
Invest Your Time Wisely

cost averaging

There’s often irrational panic in investment markets.

Most recently that’s been due to the Wuhanvirus/coronavirus/covid19 scare.

If you’re selling while the stock market is falling, you’re losing money.

You want to buy low, and sell high – but since you can never know where either the bottom or top is, how can you mitigate against market ups and downs?

Cost averaging.

What is cost averaging? It’s a way of hedging your investments against momentary swings in the stock market by lowering your average cost of each share.

A simplified cost averaging example for Universal Widgets Inc.

Universal Widgets Inc (UWI) is trading today for $10 per share. You like the company, and decide to buy $1680 in UWI shares (a total of 168 shares).

Next month, UWI has dropped to $7 per share. You still believe in the company’s future, and you still have $1680 to invest in the market, so you buy another $1680 worth of UWI stock at $7 per share (240 shares total).

Two months later again, and UWI has dropped to $3/share. Perhaps your confidence in the company has dropped some, but if you sell now, you’re guaranteed to lose over $2000! So instead of selling, and guaranteeing your loss, you again buy $1680 in shares (560 more).

You now have 968 shares of UWI that cost you $5040.

But they’re only worth $2904.

What share price does UWI need to hit in order to show a profit?

Now you merely have a simple math problem: take the cost, subtract the value, and divide by total shares: (C-V)/S

$5040 – $2904 = $2136

$2136 / 986 = ~$2.21

So when UWI gets back above $5.21 per share, you’re in the black.

If/when it recovers to your initial purchase price of $10, your portfolio will be worth $9860!

By cost averaging, you’ve reduced your risk, and increased your likelihood of coming out ahead when investing

Sidebar

This is, more-or-less, how some mutual funds grow (and why beginning investors (and most seasoned investors) should buy-into mutual funds instead of individual stocks).

the richest man in babylon by george s clason

The Richest Man In Babylon by George S Clason is one of the few audio books I have enjoyed – and one that I think everyone should read/listen to frequently: it’s the early 20th century version of Dave Ramsey’s Total Money Makeover (another great book).

The advice/suggestions in this book are things I didn’t listen to soon enough – and I’d hasten to help anyone do earlier what I didn’t 🙂

If you take nothing else from this book, follow the first “law”:

The first 10% is mine to keep

From a Christian perspective, that should be reworded to “the second 10% is mine to steward” (if you presume the first tenth belongs to God).

This sounds difficult – but if you incorporate that single principle into your financial thinking early, you will be very well served later in life.