There's a principle in investing called dollar-cost averaging, and it works like this. Say you buy 100 shares at $1 each, the market takes a dive and they drop to 50 cents. Is that bad? Not if you've done your homework and bought shares in a sound, valuable company. If you spend another $100 at the new price, you'll get 200 shares for the same amount. You then take the average by adding up the total cost and dividing it by the number of shares ($200 divided by 200 shares) and you've brought the price per share down to an average of 67 cents. You get more shares of stock per dollar and when the market inevitably recovers, you make more money.
If the price of the stock rises, it that good? Yes and no because now if you buy more, you're paying a higher price per share. So, contrary to the emotional reaction, you're usually better off holding or buying when shares fall (as long as you have reason to believe they'll eventually rise again) and holding or in some cases even selling when they rise.
Fear is an instinct that comes from the gut, but intuition comes from the mind and heart. If you listen to your mind and heart, your gut-wrenching fears won't fool you.
Reacting to daily fluctuations in the market is less wise than following longer-term strategies. The basis of the pyramid structure is that you're a long-term investor. You're in for the long haul, and you simply ride out the temporary emotional oscillations of the mass of the mass of investors. You're not a day trader focusing all your energies on the market and trying to make your percentages on lots of little movements. Whether the market goes up or down doesn't mean as much long term. You fall a little here and rise a little there and the dollar-cost averaging works out to a long, steady rise. History has shown that no matter how far its falls, over time the overall market eventually comes back to a higher level than its previous best. Day to day and month to month, it's volatile but over years and decades, it still grows.
The masters of investment, the individuals, families and organizations that have stood the test of time and built fortunes over decades, generations and centuries know these principles. The majority of investors don't and their actions are based not on financial wisdom but on fleeting opinions that change with the weather. There's even an investment philosophy call contrarianism that says to be financially successful, all you have to do is the opposite of what the masses are doing. You can hit about 75 percent accuracy that way!
A Wall Street financier once said to me, "If you ever see an investment advertised in every conceivable form, you'd better pull out." It's common to see investment ads in magazines such as Worth and Forbes, but if they start showing up in newspapers and glamour magazines, it's time to think twice. Just because the stock or real estate market goes up and people are making money doesn't mean it's time for the fall and big run, the herd phenomenon. When people are leaving their careers in droves to play in the market, making risky margin loan investments and throwing their total savings into too few investments, that's when the market is primed to crash.
Early in 1929, s shoe-shine boy gave multimillionaire Bernard Baruch a hot stock tip. Mr. Baruch went to his office, called his broker and said, "Sell me out. When shoe-shine boys are giving tips, it's time to get out of the market." That October the biggest crash in financial history struck, but since then the market has risen over and over again to many times its previous record highs. If $100 has been invested into a managed fund in 1928 and left alone, by 2002 it would have grown to $175,178. In contrast, if the same $100 were switched between investments and asset classes as soon as they started to show negative returns, it would have grown to just $86,902 over the 74 years.
Stability and patience are the keys. As a budding financial genius and master, your job is not to listen to the mass consciousness that fears and flees, but to adhere to the tested principles. Don't spring up like a short-lived, flimsy weed. Grow like a great sturdy oak tree.
Written by:
Dr. John F. Demartini author of: "How
To Make One Hell of a Profit and Still Get To Heaven".
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