Investing on Auto-Pilot
When you invest the same amount of money regularly, you buy more shares when prices are low and fewer shares when they are high (a $100 investment buys only one share when the share price is $100 but it buys five shares when the share price is $20). If you are investing over the long-term, you are likely to be buying at lots of different price points. Always buying more, low, and fewer high!
If you want to end up with a lower cost per share than the average price of the shares during the investing period, you don’t want to be buying the same number of shares regularly—but you do want to invest the same amount of money.
The difference will become clear as you read on. (A few traditional brokerages are now adopting measures to provide this advantages but it’s easier to implement in a DRIP portfolio.)
Doubtless, you’ve heard that you should “Buy low and sell high”. Great theory, but how do you do it? Stock prices fluctuate. There’s no crystal ball telling you exactly when to buy.
Since DRPs make it feasible for you to invest small amounts on a regular basis, you reduce your risk of buying large chunks of shares at exactly the wrong time. You’re automatically buying more shares when the price is low and fewer shares when stock prices are higher.
Regular invested removes the need to pay much attention to marker fluctuations because you automatically benefit from any temporary bargains that came along.
This is called “dollar cost averaging” and it’s a simple and reliable way to build wealth over time.
Revered by billionaire investor, Warren Buffett, financial experts at Forbes, Barron’s and the top best-selling investment books, dollar-cost-averaging is one of the most reliably successful long-term investing strategies. It makes saving for retirement easy because all that’s needed is a regular flow of even very small amounts of money. And it helps you withstand the impulse to buy or sell with the crowd, which is how most investors limit their upside potentially and/or lose money in the stock market.
Using this strategy, your cost will be substantially less than the trading price of the shares during the period you are investing. That’s because you automatically buy more shares when the stock is selling at lower prices and fewer shares when it is selling at higher prices. Of course, this technique is only appropriate for those who invest with a long-term outlook (five years at a minimum). It will not produce results for traders looking for a fast buck.
With DRIPs, you can put the strategy of dollar-cost averaging on auto-pilot. You simply invest a certain dollar amount on a regular basis. Result: You get more shares at lower prices and fewer shares at higher prices. Do this regularly with a no-fee DRIP and you will build wealth in the most reliable and cost-efficient way possible.