LITTLE KNOWN INVESTING SECRETS: HOW TO BUY LOW (ALWAYS)

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Categories: investing, parents, personal finance

“Investing in an index fund is a form of passive investing. The primary advantage to such a strategy is the lower management expense ratio on an index fund. Also, a majority of mutual funds fail to beat broad indexes, such as the S&P 500.”

Definition of an Index Fund by Investopedia 

 A mutual fund is like a BASKET which holds any type of investment. For today’s article, we are looking only at the index mutual fund(s) which hold stocks. A stock Index Mutual fund holds in it’s basket a wide variety of stocks from all different types of companies. A stock index fund offers a low cost way to invest in a cross-section of companies.

 MAIN TOPIC

 My parents were really smart about money  and wanted to pass on their financial education to me. So when I was in my early 20’s, my dad started teaching me his business. He had a real estate company; but not your typical real estate firm; it was like a REAL ESTATE FIRM PLUS. Sure, he had people working for him, including my mom, who took clients around, showed them property and helped them through the sale, garnering a commission along the way. These agents also “listed” clients’ homes for sale and took a cut on that end too.

In addition to the commission based business he also had an “ownership based” real estate business. This one was the real money maker. He bought run down homes that needed a lot of work; fixed them up and either sold them for a tidy profit or rented them out.

This is the business he wanted to teach me.

In my younger days, he helped me buy a dilapidated home, renovate it, and resell it. And, even though he did most of the work (I really was not too responsible at that age), he let me keep the profit. And that money allowed me to begin investing.

PRACTICAL APPLICATION

That was how I came upon a nice chunk of cash. Even back then, I was NOT A SPENDTHRIFT. I had this money, and I knew I needed to do something to preserve and make it grow. So I opened a brokerage account with a stockbroker. Fortunately, I happened upon a decent broker who graciously responded to my never-ending barrage of questions.

I learned a lot from him, but the most important concept he taught me was: HOW TO BUY LOW.

DOLLAR COST AVERAGING

This concept is one that guarantees that you will buy more stock when prices are low than when they are high. It is ideally suited to investing in mutual funds, and I bet some of you are already practicing this strategy.

Before I lay out the approach, this method is for money you have designated for long term investing (at least 5 and preferably 10 years or more) and will not need soon.*

Step-by-step here is what you do and how it works:

1. Decide on a specific amount of money that you can invest (for the long term) regularly; monthly or quarterly.
2. Determine where the money will come from; paycheck or bank account.
3. If you have a work retirement account (401K), you definitely want to make sure that you contribute some of your investment dollars there.
4. Choose where you will purchase these investments, either your work 401K retirement account and/or a discount broker such as Vanguard, Charles Schwab, Fidelity, TD Ameritrade etc.
5. Choose the investment or investments that you want to purchase. If you are just starting out get one or both of these type of stock mutual funds shown in the box below.
6. Arrange with both parties; bank (or employer) AND brokerage company to have the money transferred and designated to purchase your desired fund(s).

BROAD BASED USA AND INTERNATIONAL STOCK INDEX FUND EXAMPLES

A total return USA stock market index such as Vanguard Total Stock Market Index (VTSMX)

A total return INTERNATIONAL stock market index such as Vanguard Total International Stock Index (VGTSX)

 Many mutual fund companies offer these types of funds

(If you are investing in a work retirement account, choose the Index fund(s) closest to a broad based International and/or USA Total Market Index.)

That’s it, you’re done!

HOW DOES IT WORK?

Monthly investment amount: $200.00

Investment choice: Vanguard Total International Stock Index (VGTSX)

When price is LOW-$8.39 (in February) you automatically BUY MORE-23.84 shares      

When price is HIGH -$14.41 (in December) you automatically BUY LESS-13.88 shares

Because you buy more shares when the price is LOW, than you do when the price is HIGH, your AVERAGE COST IS LOWER overall!

The simple tactic of DOLLAR COST AVERAGING guarantees that you will buy MORE when prices are LOW and LESS when prices are inflated!

*Caveat: Before investing make sure you have taken care of these 3 steps first:

• Get rid of all credit card debt.
• Purchase term life insurance if you have someone (wife, husband, &/or kids depending on your income).
• Save at least 6 months living expenses in a bank savings account (on-line or bricks & mortar-it does not matter which).

ACTION STEPS:

Get a notebook and label it: “(your name) Personal Finance” and store it by the computer. Use it for all of your personal finance goals, thoughts, activities, and plans.

Go to your work human resources office, get information about the 401(K) plan. Review your investment options and look for USA and International Index funds.

Open an account in a discount brokerage such as Vanguard, Fidelity, Charles Schwab, TD Ameritrade, etc. Check out their list of USA and International Index Funds.