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Optimal Finance Daily - Financial Independence and Money Advice
3350: Dollar Cost Averaging by Ramit Sethi of I Will Teach You To Be Rich on Smart and Steady Investing
00:09:35
Ramit Sethi breaks down dollar-cost averaging as a smart way to invest consistently over time without trying to time the market
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All right, remember, the machine knows if you're lying. First statement Carvana will give you a real offer on your car. All online.
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False. True.
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Actually, you can sell your car in minutes.
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False. That's gotta be true.
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Again, Carvana will pick up your car from your door, or you can drop it off at one of their car vending machines.
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Sounds too good to be true. So true.
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Finally caught on. Nice job. Honesty isn't just their policy, it's their entire model. Sell your car today too.
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Carvana.
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Pickup fees may apply.
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This is Optimal Finance Daily Dollar Cost Averaging by Ramit Sethi of iwillteachytoberich.com When I want to sound smart and intimidate people, I calmly look at them, chew on a muffin for a few seconds, and then throw it against the wall and scream. Do you? Dollar cost Average people are often so impressed that they slowly inch away, then whisper to people around them. I can only guess that they're discussing how suave and knowledgeable I am. Dollar Cost Averaging Investing Slowly over Time Anyway, dollar cost averaging is a phrase that refers to investing regular amounts over time, rather than investing all of your money in a fund at once. Why would you do this? Imagine if you invest $10,000 tomorrow and the stock drops 20%. At $8,000, it will need to increase 25%, not 20%, to get back to $10,000. By investing at regular intervals over time, you hedge against any drops in the price. And if your fund does drop, you'll pick up shares at a discount price. In other words, by investing over time, you don't try to time the market, you use time to your advantage. This is the essence of automatic investing, which lets you consistently invest in a fund so you don't have to guess when the market is up or down. We've covered your automatic infrastructure to set up automatic investing. Configure your accounts to automatically pull a set amount of money from your checking account each month. Remember, if you set it up, most funds waive transaction fees. But here's a question if you have a big pile of money to invest, what's the better option dollar cost Averaging it or investing the entire lump sum all at once? The answer might surprise you. Vanguard Research found that lump sum investing actually beats dollar cost averaging two thirds of the time because the market tends to go up and stocks and bonds tend to outperform cash. Investing all at once produces higher returns in most situations. But and there are several buts. This isn't true if the market is going down. Of course, nobody can predict where the market will go, especially in the short term. And investing isn't just about math, but about the very real effects of your emotions on your investing behavior. In short, most of us already dollar cost average since we take part of our monthly paycheck and invest it. But if you have a lump sum of money most of the time, you'll get better returns by investing it all at once. Buying Into Individual Index Funds Once you've got a list of index funds you want to own in your portfolio, usually three to seven funds, start buying them one by one. If you can afford to buy into all of the funds at once, go for it. But most people can't do this since the minimum for each fund is between $1,000 and $3,000. Just like with a target date fund, you want to set a savings goal to accumulate enough to pay for the minimum of the first fund. Then you'll buy that fund, continue investing a small amount in it, and set a new savings goal to get to the next fund. Investing isn't a race. You don't need a perfect asset allocation tomorrow. Here's how to handle buying multiple index funds over time. Let's say you check your conscious spending plan and it allows you to invest $500 per month after contributing to your 401. Assuming all of your funds have a thousand dollar minimum, you'll set a Savings goal of $1,000 for Index Fund 1 and save for two months. Once you have accumulated enough to cover the minimum, transfer that $1,000 from savings to your investment account and buy the fund. Now set up a contribution of $100 per month to the fund you just bought. Then take the remaining $400 per month set aside for investing. That's $500 total minus the hundred dollars you're investing in Index Fund 1 and start another savings goal towards Index Fund 2. Once you've saved enough, buy Index Fund 2. Repeat this process as necessary. Sure, it may take a few years to get to the point where you own all the index funds you need, but remember, you're taking a 40 or 50 year outlook on investing. It's not about the short term. This is the cost of constructing your own perfect portfolio. Top Tips to Remember Once you own all the funds you need, you can split the money across funds according to your asset allocation. But don't just split it evenly. Remember, your asset allocation determines how much money you invest in different areas. If you have $250 to invest per month and you buy seven index funds, the average person who knows nothing, that is most people, will split the money seven ways and send $35 to each. That's wrong. Depending on your asset allocation, you'll send more or less money to various funds. Using this your monthly total amount of investing times percentage of asset allocation for a particular investment equals the amount you'll invest there. For example, if you're investing $1,000 per month and your Swensen allocation recommends 30% for domestic equities, you'll calculate $1,000 three times 0.3 and that's $300 to put towards your domestic equity fund. Repeat for all other funds in your portfolio. Finally, if you opt for investing in your own index funds, you'll have to rebalance about once a year, which will keep your funds in line with your target asset allocation. You just listened to the post titled Dollar Cost Averaging by Ramit Sethi of iwillteachytoberich.com so you're about to make a trade based on a friend's text, but which u do you listen to is it we could buy a house in Tulum, get optioning those options, we could lose everything. Or let's do a little research, get your head in the trade and make the investment decision that's right for you. 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Ramit mentioned in the article how it may take a few years to save enough to get to the minimum investment required for all of your desired index funds. For example, if you were to invest In a popular three fund portfolio of the Vanguard funds VTSAX, V VTIAX and VBTLX, you'll need $3,000 each or a total of $9,000. But there are a couple of other ways to achieve the same result with a much lower cost of entry. First, let me give a shout out to the humble Target Date Index Fund. Vanguard, Fidelity and Schwab all offer funds that contain U.S. stocks, international stocks and bonds at a very low expense ratio and low or no minimum investment. For example, Vanguard's 2050 fund VFIFX, has an expense ratio of 0.08%, a minimum investment of only $1,000, and it contains those three Vanguard funds I just mentioned. ETFs offer another low barrier to entry path to get into a diversified portfolio. Most brokerages now offer ETF trades with no transactional fees and even offer partial shares. That means you could buy a three fund portfolio of ETFs that mirror those higher minimum investment funds with any amount of money. To start at the end of the day, the nuances between these strategies don't matter much. Do what you're comfortable with and focus on the big things that will move the needle. As my friend Jeremy Schneider with Personal Finance Club always says, spend less than you make and invest the difference. That's it for today. Thank you for listening and being a subscriber of the show. Have a great rest of your day and I'll see you tomorrow, where your optimal life awaits.