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How to get rich a month at a time

The chances of winning $1 million in a lottery are about 20 million-to-one. But according to a Consumer Federation/Primerica study, nearly 50 percent of people making less than $30,000 a year believe that hitting the jackpot is their only chance of becoming a millionaire.

That notion is dead wrong. The odds of accumulating more than $1 million are almost 100 percent for anyone who starts saving and investing small amounts early and often.

For instance, if you put aside $50 a week for 40 years and it accumulates at 9 percent interest, you'll have the tidy sum of $1,026,853.

The fancy term for steadily investing an amount of money in stocks at regular intervals, regardless of whether the stock market is up or down, is dollar-cost averaging.

How it works

Dollar-cost averaging works because when you purchase shares at regular intervals in fixed dollar amounts, you pay a lower cost per share for a stock or mutual fund. You automatically buy more shares when prices are low and fewer shares when prices are high.

Let's say you decide to invest $100 every month. The first month, the share price is $10, so you are able to buy 10 shares. The next month, the price drops to $5 a share and your $100 buys 20 shares. By the third month, the price is back up to $10 a share, and you buy another 10 shares. By the end of the quarter, you own 40 shares at an average cost of $7.50. Meanwhile, the average monthly share price of the fund was $8.33 ($10 + $10 + $5 divided by 3 months).

When the market is steadily rising, regular investing really pays off. If you invest $100 a month in a stock that goes up steadily from $10 a share in January to $15 a share in February to $20 a share in March, you'll acquire 10 shares in January; 6.66 shares in February; and 5 shares in March for a total of 21.66 shares. If you had waited until March and bought $300 worth of stock, you would have gotten only 15 shares.

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Even when the market is falling, dollar cost averaging can cushion the blow. Let's say you invested $100 in January on a stock that is selling for $20 a share. In February, it falls to $15 a share and to $10 a share in March. If you bought the stock in January, you would have gotten 5 shares. In February, you'd get 6.66 shares, and you'd buy 10 shares in March. The average price per share you paid is $13.85, while the average price of the shares is $15.

Don't worry, be happy

In other words, by dollar cost averaging, your gains are a little larger and your losses are a little less. And the odds of your investment appreciating over time are better than average because you purchased the shares at a lower than average rate. Your money goes further, and you get a great deal on the investment.

"Dollar cost investing relieves your worries about market ups and downs," says Mark Supic, senior vice president at Primerica, a financial services company based in Duluth, Minn.

Dollar-cost averaging is "pretty simple stuff" that removes lots of the risk of investing, adds Peter E. Breen, chief executive officer of BUYandHOLD.com, a Web site that encourages small investors to purchase single or even less than single shares of stock. He recommends allowing your employer or some online or offline brokerage firm to deduct a regular amount from your paycheck, checking or savings account to be invested in stocks you know and understand.

"If you drink Coke, buy Coke. If you shop at Home Depot, then buy that," Breen says.

The long haul

The trick is starting now and staying disciplined enough to invest every month. It's also important to stick with stock or fund allocation choices through the predictable ups and downs. As Breen says, "There hasn't been a single year in the history of the stock market when someone holding onto their stocks didn't do better than someone who traded frequently."

Dollar cost averaging may not make you a millionaire, but it will certainly put you on the road to a richer future.

-- Posted: March 21, 2000

 

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