Dollar Cost Averaging | Squirrels Do It, Why Can’t We?
Dollar Cost Averaging is like the squirrel gathering acorns one at a time, so he can sustain himself through a long cold winter. In similar fashion, you wanna Dollar Cost Average so you can gather paper containing the faces of random presidents, preferably those of Franklin and Grant, all in an effort to sustain yourself through a long, prosperous, restful….Retirement!
Who knew man and squirrel had so much in common? Well, other than the obvious; occasional wiskers and the ability to stand erect, the similarities stop there. Squirrels keenly focus on the gathering of forage as they know they have to do so, in order to survive.
Humans on the other hands, well we are fortunate, we have a safety net. Whether it be our families, the government, or lottery winnings, we see less of a need to store copious amounts of currency then a squirrel does nuts. Because we lack the same discipline as our rodent counterparts, many have been forced to spend retirement years, donning name tags and in some cases, hair nets.
The Nuts and…Nuts of Dollar Cost Averaging…
So, what is Dollar Cost Averaging in relation to financial planning? Please excuse my aforementioned squirrel tangent. Dollar Cost Averaging is the practice of buying publicly traded equities at random prices, throughout a period of time.
The thought is, if you were to buy equal shares of IBM, 10 shares @$130, 10 shares@ $135, and 10 shares@ $140, then your average, price per share is $135. Because of your intelligent IBM purchase you will also be the proud recipient of 4 dividend payments throughout the year.
These dividend payments are not guaranteed of course, but since they have had 18 years of consecutive dividend increases, I think you’re safe.
These dividend payments, bring your average price per share, down. Since you now have 30 shares, and you’ve received 4 quarterly dividend payments, which by the way is a cool $1.57 per share right now, you are now down to an average price per share of $129.
Do this year in and year out, not only does your average price per share decrease, but your cache of IBM stock increases. You go Boy, make that squirrel proud!
Squirrels don’t time the acorn market, why do we try timing the equity market?
Timing is everything, at least it is when you have the tools, experience, and time to devote to it. Timing the equities market, without these proper things, is a fools game. The folks on the other side of the trade have faster computers, more leverage, and likely more experience.
Don’t get sucked in, I’m living proof that its a game for suckers and very few, outside of the “big money” actually win. I am the king of buy high, and sell low. That is until my; aha moment where I realized the errors of my ways and accepted the fact that, my winning course of action is Dollar Cost Averaging.
Its like the squirrel accepting the fact that he can’t play piano. Not only does he have no rhythm, but lacking opposable thumbs proves disastrous to a piano player.
So the moral of the story is; gather as many shares of publicly traded companies at varying prices, score some dividends, let it compound, and then look up in 20 years at the arsenal of
acorns Benjamins you’ve amassed. Its amazing how much you can learn from a bushy tailed acorn horder. Adopt the practice of Dollar Cost Averaging today!
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