the way I see it you have two ways to invest one you can try to time the
market or two you can just forget about trying to time the market and just
invest consistently and automatically using dollar cost averaging in a
previous video I talked about the pros and cons of trying to time the market
and using actual historical data through the S&P 500
I made a spreadsheet that tells you how much money you would have ended up with
if you had timed the market perfectly and bought in at all the right times
after the three major market crashes in the last 30 years and I also tested to
see how much money you would have ended up with if you hadn't tried to time the
market at all so in that spreadsheet I projected what would have happened if
you had invested $500 a month into the S&P 500 over a 31 year period using
dollar cost averaging in other words you invested equal dollar amounts into the
same index fund at the same time every single month and this was whether the
market was going up or down then I compared that strategy to a market
timing strategy where in an imaginary investor with psychic abilities timed
his purchases with 100% accuracy what's super interesting is that the investor
who invested using dollar cost averaging ended up with one million one hundred
eighty three thousand two hundred twenty four dollars whereas the investor who
timed to the market perfectly ended up with 1 million two hundred thirty-five
thousand seven hundred sixty dollars in other words not a huge difference the
dollar cost averaging investor ended up with only slightly less than the
investor who times the market perfectly given that timing the market isn't even
actually possible I would say that dollar cost averaging is a pretty good
way to go unless of course you actually do have the ability to see the future in
which case we need to talk but for now I'm just gonna assume that you aren't
able to see the future and that you actually do want to learn about dollar
cost averaging so in this video I'm going to explain what dollar cost
averaging is and how it works I'll also talk about why dollar cost averaging is
so effective and finally I'll show you how to
actually do dollar cost averaging in your own portfolio so if that sounds
good to you give this video a like and let's get right into it dollar cost
averaging is a strategy where you invest the same dollar amount into the same
stock or fund at regular intervals and this interval can be weekly bi-weekly
monthly quarterly whatever interval you choose so let's say you decide to invest
$500 into the S&P 500 on the first of every month that means you're buying
$500 here here here here here here and here and so on and so forth every single
month every time you buy you're getting in at varying levels of the market so
the number of shares that you get for your 500 dollars will also vary when the
S&P 500 is high your $500 gets you fewer shares and when the S&P 500 is low your
500 dollars will get you more shares do you see what's happening there when the
market is high you buy less shares and when the market is low you end up buying
more shares that is how dollar-cost averaging works it's kind of like when
you're at the grocery store and you see that something is on sale you want to
load up on it and then if something's more expensive you tend to buy less of
it and ironically when it comes to the stock market most people end up doing
the exact opposite right after a big drop in the market when it's actually
the cheapest time to buy stocks most people don't buy it all and in fact they
do the opposite they sell so we're all guilty of this as much as we like to
think that we're rational human beings when it comes to our money we're
actually more driven by our emotions so the number one reason why dollar cost
averaging is so effective is because it protects us from our own emotions so
this is a perfect segue into what I want to talk about next
does dollar cost averaging actually work the short answer is yes it works
starting in 1988 if you had invested $500 a month into the S&P 500 with
dollar cost averaging you would have over 1
one eight million dollars today and out of that 1.1 eight million dollars only a
hundred ninety two thousand dollars of that was money that you actually put in
the rest of it all was stock market growth pretty crazy right you end up
with way more money than you put in so yes I would say dollar cost averaging
works but let's go even deeper shall we let's try to understand why it works so
dollar cost averaging is effective for three reasons the first is that it takes
emotions out of the equation and when it comes to investing you know your
emotions are your worst enemy the best time to buy in the market is also gonna
be the scariest time to buy so if you invest according to your emotions you'll
end up just chasing the market and getting nowhere
but with dollar cost averaging you invest like a robot no matter what and
this results in your average entry price improving automatically over time the
second reason why dollar cost averaging is so effective is that your money has
no downtime in other words all your investable money
is invested at all times instead of parking your money in a bank account
while you're sitting out and waiting for a better time to buy all of your money
is working for you in the stock market day in and day out and when your money
is working for you in the stock market you're participating in all the
dividends and all the growth that gets compounded over time people who instead
decide not to do a dollar cost averaging and they would rather just sit on a
bunch of cash until there's a better time to buy they might risk having their
money just sit in a bank account earning nothing for a really long period and
this ends up penalizing their returns over time because they're not collecting
any dividends and they're not getting any growth while that money is parked in
a bank account last but not least dollar cost averaging works because it's
actually doable unlike a strategy that requires you to time the market
perfectly dollar cost averaging is actually realistic anyone with any
amount of time or knowledge has what it takes to implement a dollar cost
averaging strategy your six your old cousin can do it my grandmother
who doesn't even know how to turn on a computer can do it even my dog can do it
if you're still not convinced about dollar-cost averaging check out this
extreme example so back in 1989 there was a huge bubble
in the Japanese stock market so in December of 1989 it peaked at around
40,000 and when that when the stock market bubble burst it crashed really
hard let's say you were unlucky enough to buy right at the peak of the market
then 30 years later you're still in the red you haven't made your losses back
because the Japanese stock market still has yet to recover back to those levels
scary I know however this is the cool part if you had followed a dollar cost
averaging strategy just like we've been talking about you would actually have
made money even if you started investing right before the crash if you just kept
on dollar-cost averaging all the way through you would end up in the positive
today I think the example of the Japanese stock market bubble is
especially relevant today because as of the date that I've recorded this video
December 2019 the US stock market is also at all-time highs and many people
are scared to start investing now because they don't want to be like the
people who invest it at the very peak of that Jap Japanese stock market bubble in
1989 the US and Japan economies are very different so I'm not saying that the
u.s. is gonna be anything like Japan but still in market conditions like these I
think the safest way to invest is dollar cost averaging I wouldn't go all-in with
my money right now but I wouldn't be sitting out completely either instead I
would take the middle road of dollar cost averaging where I am investing but
not investing everything at once so how do you actually do dollar cost averaging
okay so this is obvious but first you need to have a brokerage account and I
always recommend either fidelity or Vanguard and you can check out the video
right here for more information on the pros and cons of fidelity versus
Vanguard and once you pick a brokerage you want to open the right type of
account and for most of you the best one to start with is a Roth
I have a bunch of videos about Roth IRAs on my channel so just check it out
they're all on my channel and if you're not subscribed to my channel yet then
what are you waiting for once you have your account set up the next step is to
buy an index fund in my example earlier I talked about investing in the S&P 500
and of course you can't actually invest in the S&P 500 because it's an index and
an index is just a number that's being tracked
so to invest in the S&P 500 you would need to buy an index fund where a funds
that's structured to to track and mirror the S&P 500 index and even beyond S&P
500 index funds you have a lot of different options
there's also international stock index funds there's small cap stock index
funds there's emerging markets stock index funds the options are literally
endless for more ideas on how to pick index funds and what kinds of index
funds to use for your dollar cost averaging strategy check out this video
right here where I go more into depth also when you're picking index funds you
also want to make sure it's a mutual fund versus an ETF because ETFs don't
allow you to make automatic recurring purchases but with mutual funds once you
buy into it you can set it up so that your money will automatically buy more
shares of that mutual fund every month so again in order to implement
dollar-cost averaging you're gonna have to buy the mutual fund version of an
index fund and not the ETF because with ETFs there's no way to automatically
purchase more every month unless you want to do it manually which kind of
defeats the whole purpose so that's pretty much it to implement dollar-cost
averaging in your portfolio you first open a brokerage account you set up a
recurring monthly transfer from your checking account on the first of every
month or whichever day makes sense for your pay schedule and then you have it
by a fixed dollar amount of your index fund and then you can just sit back let
it run on autopilot and just collect those Benjamins look dollar cost
averaging is boring it doesn't make for exciting cocktail party top and you're
never gonna be featured on the news for being some sort of stock market genius
but it works dollar cost averaging is the best way for anyone
any amount of time knowledge or money - slowly but surely build wealth if you
choose to go this route of dollar-cost averaging you'll never find yourself
obsessing about when to invest whether to invest how much to invest
none of this decision fatigue instead you can just have your investments
running on autopilot and so that you can put your energy towards all the other
things in your life that you want to do that's it for now thank you so much for
spending this time with me I really appreciate you I post new videos every
Wednesday so I'll see you next week same time same place
remember to invest early and often until boldly and courageously go after the