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When you finally have a master plan for investing, you will need to go into the finer details of how exactly to do it. There is no doubt that you have to build a portfolio, but there is a great difference between dumping all your money into the investment in one go and investing the same amount of money over a period of time.
Throwing all your money in at the same time does result in incredible earnings if you manage to time your investment right, but the reverse is true. A badly timed investment will cause you to lose everything. How will you ever be able to know when is the timing right? You can study economic data and pronoun trends, but all these are nothing but looking at things in retrospect.
Ask yourself this, are recessions the result of certain practices or are these practices isolated as causes because a recession happened? Being able to identify causes does not allow you to predict future market trends because these causes always only surface after the damage have been done. Moreover, the nature of the market is always shifting. Past models and data have never been able to provide any warnings to even top economists and governments of the world on each and every recession in modern history.
However, there is one trend that has remained true for the last hundred years of the world’s economy. The economy is always moving up or down. And this is the reason why one of the most successful strategies for wealth growth and protection is one where money is invested regularly.
One of these regular investment strategies is a monthly investment plan. A regular input based on monthly intervals coincides with the income received by the large majority of salaried workers, making it more logical and relevant than any other investment intervals. A more frequently interval would be troublesome and add on to the administrative work needed for money transfer, while a long interval would mean much of the salaries are sitting in banks and not doing any work for their owners.
We know past trends don’t say much about the future. The upward trend of the market over the last hundred years is no exception. It doesn’t guarantee that the market will continue to go up in the next hundred. So how does a monthly investment plan reduce your investment risk?
Monthly investments works on the simple principle that you can buy a greater quantity when prices are cheap and less with prices go up. In this way, you reduce exposure to higher prices and offset prices by down averaging with greater volume of low prices. The strategy is self regulating and works as long as you are committed to invest regularly.
For example, you invest $1000 every month into unit trust A. In month 1, unit trust was priced at $1.00, so you bought 1000 units. In month 2, the price of unit trust A rose to $1.25, so you could afford only 800 units. The average buy price of your 1800 units is now $1.11. This means that if unit trust A trades at a price above $1.11, you are making money, else you will lose money. In the third month, unit trust A traded at $0.80. Although his means you are losing money, you continue to buy 1250 units of unit trust A with $1000. This down averages your buy price to $0.98. In the fourth month, unit trust A goes back to the price on the first month, which was $1.00.
Over the 4 months, the average price of unit trust A was $1.01, but because you bought more during the low prices and less during the high prices, your average buy price is only $0.98; lower than the monthly average price. Over a long period of time, this self regulating mechanism continues to act; eventually your average buy price will be much lower than the actual monthly average. This means that should you sell your units after a long time, you are going to churn a profit at average prices or even slightly below the average. In this way, your investment risk is greatly reduced.
A monthly investment plan is one of the most secure and low risk ways of investing, even when investing in moderate risk products. However, a monthly investment plan is not useful at all if the product which you invest in goes bankrupt. Moreover, re-investing regularly in a single product is required for down averaging to be effectively, thus limiting your range of products. But these downsides can be mitigated by investing in pooled funds which in turn invest in a range of different products, thus eliminating the risk of loss from any single bankruptcy.
For the monthly investment strategy to work, one must be diligent in maintaining regular investment amounts. No investment is 100% risk free, but adopting appropriate strategies can always reduce them to an acceptable level.
In today’s current investment markets, there has been an increase in the number of individuals deciding and adhering to an investment plan. Perhaps this is caused by the drastic increases in the cost of living or the profound insecurity about the future of social security, and retirement funds. Many families are looking for investments plans which help them build two funds – one for the future and one for the present. Most people are not interested in purchasing stocks and bonds. This is both time consuming and complicated.
Investment plans essential allow the an investor to buy a set number of stocks, bonds, and securities. Purchasing is done on a regular and consistent basis. Funds for the investment are taking directly from a check, savings, or money market accounts automatically. These money is used to buy stocks and bonds that were pre-decided upon. For the most part you can change any of variables at anytime. These variables include amount, frequency, and what stocks are bought. There may be fees associated with changes. Make sure these fees are known before you sign your contract with your broker. However, if you are looking for more freedom most online investments firms allow you to change your variables anytime for free.
The next important step in an investment plan is figure out how much money you would like to invest.
It is a good idea to have a household budget. This will allow you to clearly analyze how much extra money is available for investing. Due to the long term nature of investment plans, you would suffer a financial lost if you had pull out early because you invested more money then you could afford. Make sure the amount you pick is readily available for each time the investment comes up. Remember just because you have extra money now does not mean in the future you will. Many investors come up short several months after starting their investments plans because they did not budget for an emergency fun. If you do feel you are at point where you can not no longer make a regular investment more investment companies will allow you to reduce or hold the next schedule investment.
Now you know how an investment plan works and you have the money to invest. The next question is how do you decide what to invest in. Research is the key component to this step. It does take time to decide but it is well worth the effort. Make sure you find stocks that have a history of performing well in the long term. At the time of purchase they may be expensive however they will probably also continue to increases which will directly benefit you. As you feel more and more comfortable with investing feel free to add more stocks and bonds to your portfolios. Many financial experts believe that diversification is a great way to increase your investment profits.
Investment plans are a great for the casual investor to make safe, low risk investments which will lead, in the long term, to increased profit and financial stability.
