The Get Rich Slowly Method

In the investing world (and in the business world as well), the formula for success is to buy low, sell high. Due to its instant results nature, the stock market is like a dream come true for investors hoping to strike gold using that exact formula. Although the strategy sounds simple, as most investors (and many non-investors) know, timing the market is a tricky proposition.

Proponents of the market timing strategy point out that if youre able to correctly predict the direction the market (or a particular stock) is going to take, youre going to make much more money than people who catch a trend thats already formed. For instance, a stock thats accurately predicted as about to go up can be purchased, (or you can buy call options) and then you make a profit off the price increase. Or if you accurately predict that a stock is going down, you can sell it if you owned it, or you can short it and make money off of it while its going down.

All this sounds great, but accurately timing the market is a very hard thing to do. And some studies suggest that its not even that important that you try to. Meet Louie the Loser - he invested $5,000 a year in one of Americas oldest and largest mutual funds, Investment Company of America, over the past 20 years. But because his timing is terrible, every year he picks the worst possible day to invest - the day the unmanaged Dow Jones Industrial Average peaks.

Surprisingly, Louie has managed to do very well. After those 20 years, his $100,000 had grown to $441,000, averaging a respectable annual return of 13.3%. Even more surprising was the fact that if he had followed that same strategy, but invested on the day the market hit its annual low, his average annual return would have been 14.9%! Thats only slightly better than Louies performance, with none of the anxiety and risk and aggravation of trying to time the market.

The reason why dollar-cost averaging is so effective is very simple. By investing a set dollar amount on a regular basis (say, $250 a month), you get more shares when stock prices are low and fewer when they are high. Over time, the strategy reduces your average cost per share, improving your chances of becoming a slow but steady winner.

What does that teach us? To put it bluntly, market timing is overrated. Dollar cost averaging offers returns that are not that far-removed from the hypothetical best-case market timing scenarios.

In the investing world (and in the patronage world as well), the recipe for achiever is to buy low, sell high. Due to its instant results nature, the stock market is like a dream come true for investors hoping to work stoppage gold using that exact formula. Although the strategy sounds simple, as most investors (and many non-investors) know, timing the food market is a tricky proposition.

Proponents of the market timing scheme point out that if youre able to correctly prefigure the direction the commercialise (or a particular stock) is going to take, youre going to make much more money than people who catch a trend thats already formed. For instance, a stock thats accurately foreseen as about to go up can be purchased, (or you can buy call options) and then you make a profit off the price increase. Or if you accurately predict that a stock is going down, you can sell it if you owned it, or you can short it and make money off of it while its going down.

All this sounds great, but accurately timing the market is a very hard thing to do. And some studies suggest that its not even that important that you try to. Meet Louie the Loser - he invested $5,000 a year in one of Americas oldest and largest reciprocal funds, Investment caller of America, over the past 20 years. But because his timing is terrible, every year he picks the worst potential day to invest - the day the unmanaged Dow Jones Industrial Average peaks.

Surprisingly, Louie has managed to do very well. After those 20 years, his $100,000 had grown to $441,000, averaging a respectable yearbook return of 13.3%. Even more surprising was the fact that if he had followed that same strategy, but invested on the day the grocery store hit its annual low, his average yearly return would have been 14.9%! Thats only slightly better than Louies performance, with none of the anxiety and risk and aggravation of trying to time the market.

The reason why dollar-cost averaging is so effective is very simple. By investment a set dollar bill amount on a regular basis (say, $250 a month), you get more shares when stock prices are low and fewer when they are high. Over time, the strategy reduces your middling cost per share, improving your chances of becoming a slow but steady winner.

What does that teach us? To put it bluntly, commercialise timing is overrated. Dollar cost averaging offers returns that are not that far-removed from the hypothetical best-case market timing scenarios.

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