There is an important financial measure called “opportunity cost”.
Basically, this means that if you spend money on something you automatically lose the opportunity to spend it or invest it on something else.
Or, as my Grand Dad used to say:
“You can’t spend the same money more than once!”
Over time, the stock market has outperformed all other types of investments, including bonds, bank deposits, government securities and mutual funds.
The stock market may not always seem rational, but it’s usually right in the long haul.
Over the short term, the market moves based on enthusiasm, fear, rumor and news.
Over the long term, though, it is mainly earnings and dividends that determine whether a stock’s price will go up, down or sideways.
A good stock may go up even when the market is going down, while a stinker can go down even when the market is booming.
Some days stock prices make absolute sense.
Other days they seem ridiculously expensive or extremely cheap.
The key to investing is to determine which is which on any given day, and then take advantage of it!
Prices are set by where a company appears to be going, not where it”s been.
Investors buy stocks with the expectation that they’ll be able to sell them for higher prices at some time in the future.
That means they expect that earnings will likewise grow.
And if they don’t, the best past performance in the world isn’t going to help.
Historically, a well managed and widely diversified portfolio of correctly selected stocks has produced substantial returns with relatively modest risk!
“Buy Low and Sell High” or,
“Buy High and Sell Higher!”
We all heard the above simplistic bits of advice. Unfortunately, as market cycles move up and down, and security prices rise and fall, it’s hard to pinpoint the precise time when it’s the most advantageous for either transaction.
One way to weather market cycles more successfully is with disciplined, periodic investing, often termed cost averaging.
This simply means putting an equal amount of money at regular intervals into one or more securities.
Periodic investing can be an easy way to build up your portfolio!
Employ this technique by setting aside a fixed amount of savings every month to invest.
When you invest the same amount every time, you buy more shares when the prices are low and less when the prices rise. The result:
You can potentially lower your average cost per share.
Investments allowed to grow over time can increase in value surprisingly fast.
The systematic re-investment of stock dividends can be a painless, automatic way to build up a sizeable “nest egg.”
The re-investment method creates a really powerful compounding effect on investments.
This is reflected in the words of Einstein, who once said that, the “Eighth” wonder of the world is compound interest!