The Philosophy: Invest small amounts regularly
So far, we’ve covered what investing is, budgeting and saving, and explained the concept of risk. Today, , we’ll unpack some concepts which can help investors manage risk and more effectively reach their investing and savings goals.
Dollar Cost Averaging
The Philosophy is to invest small amounts regularly, even in falling markets, as this can help you to ride out the downturns in the market and is one of the keys to having a healthier balance over the long run. This principle is known as dollar Cost Averaging.
How does it work? For example, say you have $1,000 to invest. Instead of investing it all at once, you could invest $100 each month into the market for 10 months.
If the stock of choice was priced at $10 the first month, you would purchase 10 units. If during the second month the stock was priced at $5, you would purchase 20 units, and so on.
In the end, you would have purchased more shares when rates were lower and fewer shares when rates were higher.
Compounding - A mathematical miracle
Compounding happens when you let the returns on an investment build up so that you are earning return on your return. Given enough time to work its magic, it provides the potential to reach a stage in your life where your money is working hard enough to provide a substantial part of your income. The below graph shows the potential savings growth of investing $1,000 per year for 30 years, assuming a return 7% per year.
