I want to build up my wealth by making my money work harder for me.Â That was my thought after reading the “Rich Dad, Poor Dad” by Robert Kiyosaki.Â I want to start investing with what IÂ can afford, even though it is not a lot.Â I startedÂ buying into stocks,Â with the limit knowledge I have.Â I made some and at the same time, I lost some.Â Â Then,Â one of my peersÂ asked me one fine day – what is your strategy in my investment?
huh?Â Strategy?Â Buy low, sell high?Â Well, he sent me some information on whatÂ could be strategies which I can learn andÂ hopefully apply to my investments.Â
What I have been doing is really to attempt to “time” the market.Â Â Going in and exiting at appropriate time butÂ trying to “time” the market has often proved to be unsuccessful for investors.Â Investing for the long term has proven to be a more fruitful investing strategy.Â There are different methods of long term investing which can provide investors with a cushion should they purchase a stock at an unfavorable price.
These are dollar cost averaging, constant dollar, and constant ratio.
Probably the simplest of the three methods is dollar cost averaging.Â This method consists of investing a constant dollar amount over a long period of time at fixed intervals (weekly, monthly, annually, etc.).Â
As anÂ example, a person might want to invest one thousand dollars every month. The idea is to keep putting forth money without exception.Â This method works most effectively when the investor owns a portfolio consisting of five or six stocks.Â An investor should only consider this method if he has a steady supply of income and he is willing to invest for a long period of time.
The constant dollar method is one where the amount of money invested is kept at a constant level.Â For instance, an investor has 50,000 dollars invested, after a certain period of time (set by the investor), the value of the portfolio will be set to 50,000 dollars again.
For example, if the portfolio increases in value to 59,000 dollars and the time set by the investor has passed, then the investor would withdraw the 9,000 dollars.Â Conversely, if the value of the portfolio decreases to 42,000 dollars and the time set by the investor has passed, then the investor will have to deposit 8,000 dollars.
This system allows the investor to take advantage of market fluctuations. A well diversified portfolio should be used with this method.
The constant ratio method requires investors to maintain a constant 50/50 ratio in the portfolio between stocks and bonds. As stock prices rise bonds are bought and stocks are sold. As stock prices decline, bonds are sold and stocks are purchased. This method, historically, is the weakest.
These methods are just some valid forms of investing for the long term. They can be applied to stocks and mutual funds. They provide investors with a nicely structured investing strategy.
Understand themÂ and learn to see if these can be of help to your investingÂ plan.Â