You should always buy low and sell high when investing, right?
“Hi Carly! I really enjoyed your class and am making big strides… I’m happy to say I have $1,000 (to open a retirement account), but I am concerned with the really high stock values. I realize that the nature of investing means that the values will go up and down, but should one invest when the values are THIS high?”
For new-be investors when setting up your retirement account you typically need a minimum investment of $1,000 and it can seem like a lot of money to invest all at once. What if you invest now and the value sinks?
First off, congratulations to Claire, to be 25 and have $1,000 set aside to invest. According to bankrate.com a survey found that 52% of Americans don’t own stocks at all. Those that do own stocks, the median retirement account balance in the U.S. for households near retirement age is $12,000.
Claire and her boyfriend Shane completed Best Money Class Ever together, “I am getting excited about being more organized; it becomes a game almost! How much money can I put away this month?”
Well in just over two months she has paid off her credit card and line of credit completely ($2,727!), started her emergency fund, and set aside $1,000 to open her retirement account. The best part is, even though she is making big grounds financially, she isn’t sitting at home with no social life.
“I want to go out, be with friends, I (previously) didn’t know how to do that and still be responsible with money,” she said.
So, is now a good time to invest?
Here’s two investing strategies that show why.
1. The Random Walk Theory
Burton Malkiel, an economist and professor from Princeton University, popularized the Random Walk Theory. He states that you can analyze past performance of stocks, but that can’t be used to predict its future movement.
In Malkiel’s best-selling book, A Random Walk Down Wall Street, he explains that the market is random: you can’t time the market. Instead you should, “trust in time rather than timing, start saving early and save regularly.”
There are risks involved with owning stock, but Claire has time on her side with 40 plus years to see her investment grow and compound.
2. Dollar Cost Averaging
Full-time fund analyst still can not predict exactly if the market has reached a bottom or top. Dollar cost averaging is an investing strategy where you invest, regardless of the stock’s price, a set amount on a regular schedule. The result is then the cost per stock averages out as more shares are purchased when stock prices are low, and fewer are purchased when stock prices are high.
After you have the minimum amount to open a retirement account you can then invest a percentage of your pay monthly to utilize the dollar cost averaging strategy. This reduces the risk of investing a large amount at the wrong time.
Congrats again, Claire on your progress towards gaining financial independence. It is official: you can be a 20-something that has fun and is financially responsible.