If there is one sure rule about Wall Street, it’s that they follow the herd. And it’s hard to make money when you’re just following other people’s investment path. And when the herd starts acting irrationally, driven by fear and not economic reality, it’s time to stand back and look at a contrarian strategy. Keep in mind that the market may not recover for another year. Use that information to your advantage by dollar cost averaging your way into any new positions over the span of 9 to 12 months (for e.g, if I wanted to buy $2400 of stock X, I would buy $200 per month over the next 12 months). This will help ensure that you buy at a good price if the market continues to fall.

The time to buy is now, when stocks are cheap and when the inevitable rebound in prices will accelerate your return. If you are dollar cost averaging, congratulations, you are buying more stocks per month today than before and this can only add to your return. But it might still be worth it to add to, or take new positions in, your portfolio to help boost your return.

When I look at the stock market right now, I see a fire sale. Everything has been marked down 50 to 80%. And while some stocks deserve this kind of correction in price, others do not. But where to find the gems in the rubble?

I see three strategies to picking winners.

1. Buy a cheap index fund. Don’t fool yourself. The stock market is going to rebound and make up all its losses. And historically, the bull run after a severe bear market shows steady returns annually until previous peaks have been reached. Buying an index fund is a safe way in investing in the overall market and participating in the recovery that is sure to come.
2. Follow what your favorite stock market guru is doing. For example, the great Warren Buffet just purchased Goldman Sachs and General Electric, investing more than 8 Billion dollars into these two companies. GE’s dividend right now is around 6% further boosting returns if you reinvest the dividends.
3. Invest more in your favorite fund riding your fund manager’s coattails to help guide you to higher returns. The best strategy in picking a mutual fund is to pick the manager running the mutual fund. In times like these, it makes sense to double down your monthly investment on your trusted mutual fund maven. (You did pick a fund because you trusted, liked and agreed with the investment strategy of the manager, right?)

Good luck and Many Happy Returns!

Disclaimer: Any stocks, funds or gurus mentioned in this article are not recommendations. They are opinions and are solely this author’s. Please use due caution and do your own research before investing your money. You are ultimately responsible for your own wealth.

The truth is: the stock market goes up and down in cycles.  These cycles usually last 5-10 years.   Take a look at the chart below.

This is the 10 year chart for the Vanguard S&P 500 Index Fund (VFINX), which represents the 500 largest companies in the United States.  As you can see, the price in Oct 1998 is similar to the price in Oct 2008.

So, if you invested $1000 in Oct 1998, you saw your money grow substantially in 2000, then you saw it drop again in 2002, rise again in 2007, and then drop again in 2008.  What a roller coaster!

If you invested one time in Oct 1998 and just sat on the money for 10 years, you pretty much broke even over this span.  Not a very good return on your money.

But, if you have been investing in your retirement plan regularly, then you’ve been dollar cost averaging.  You bought shares at the lows in 1998 and 2002, and at the highs in 2000 and 2007, and everything in between. Depending on your timing, you may have even made some money.

Here’s the scoop:

1. If you’re nearing retirement you need to remember that you probably won’t need all your retirement money when you retire.  The best strategy is to slowly withdraw the money every month or quarter over your many years of retirement.  By that time the stock market should recover, because it usually fluctuates in 5-10 year cycles.
2. You may want to consider increasing your contributions to your 401k plan.  That’s right– increase!  The stock market is on sale, so why not take advantage?

Either way, just remember, you don’t lose your money until you sell.

I am interested to know what you’re doing with your retirement account.  Please leave a comment below.

Well, if you listen to the world’s greatest investor, Warren Buffett,  you would be buying.  The market is essentially on sale.  With stocks and funds plummeting, now is the time to buy.  Wouldn’t you rather run to your grocery store during a sale?

If you already have money in the market, now is probably not the best time to sell.  The secret to success in the stock market is buy low and sell high.  Selling now would be selling low.  But don’t fret.  The world  economy will grow.  It always does.  And so will your investments.

After the stock market crash of 1987, the market experienced a remarkable rebound.  As you can see from the chart below, by 1990, the Dow Jones Industrials was setting new highs.

So how do you get into the market the sane way?

Well, first let’s cover a very important point: You will never be able to time the market.  The chances of you buying at the lowest point and selling at the highest point are very, very low.  But you can buy “near” the low and sell “near” the high.

If you believe the market is near its low point then you should start dollar cost averaging your way into the market.  Take the amount of money you want to invest and divide it by six.  Then invest that about every months for six months.  For example, if you have $6000 to put into the market. Put $1000 in every month for six months.  If the market goes down, you’ll buy more shares for your $1000.  If it goes up, you’ll make more on your previous investments.

If you’re not sure what to buy, consider an S&P 500 Index Fund.  You will own shares of the 500 largest companies in the US.

Please use the comment form below to let us know what you think.

Over the years I’ve read many articles explaining the benefits of DSPP’s, but none of them mentioned the most important issue. The investors arch enemy: fees. Though buying stock direct from a company sounds like a great idea, if you’re not investing thousands of dollars per stock each month, the fees may kill your return.

There are however, many benefits to DSPP plans:

• Some plans, like Best Buy (BBY), let you buy your first share directly from them.
• You can build your ownership over time by Dollar Cost Averaging and automatically purchase shares every month.
• Reinvest your dividends automatically and take advantage of that compounding magic.

Insane Fee Plans

To illustrate how fees can hurt a DSPP, let’s use Borders Group (BGP) as an example. To join the plan, you need to have already bought at least one share from your broker or invest a minimum of $500 directly to the DSPP. To get around the $500 minimum, you can commit to sign up for an automatic investment plan of at least $50 a month. Let’s look at both DSPP options:

1. Buy $500 of stock: Fees for the Borders DSPP are an initial setup fee of $15, and a purchase processing fee of .03 per share. At the current price of $22, the total fees would be $15.68 ($15 setup + .68 in per share fees). That’s more then the $7 a discount broker like Scottrade charges.
2. Automatic investment plan of $50 for 10 months: You would pay the same setup fee and processing fee. Additionally, Borders will charge you $2.50 every time you buy stock, which in this case is every month. If the price stayed around $22 for the next 10 months you would pay 17.57 ($15 setup + .07 in per share fees + 2.50 per buy) for the first month, and $2.57 every month after. That means your $50 investment is only buying $47.43 worth of stock. Of course, you can invest $52.57 a month to make up for the fees, but that’s just more money out of your pocket. $2.57 on a $50 investment equals a 5% fee. That means your investment needs to grow 5% to break even!

Maybe you want to invest more than $50 a month in Borders. At $100 a month the fee is $2.82 or 2.82% (you’re paying .07 a share, $100 buys you 4.55 shares). This equates to more than double the average mutual fund, and your $100 is buying only $97.18 worth of stock. $150 a month costs you $2.98 or 1.98%, still more than a solid mutual fund. And a monthly investment of $200, will cost you $3.13 or 1.56%, which is still a high expense ratio.

No Fee Plans

Now, let’s take a look at a no fee plan like ExxonMobil (XOM). To join their DSPP, you need to have already bought at least one share from your broker, invest a minimum of $250 directly to the DSPP, or commit to an automatic monthly investment of $50 a month for at least 5 months. Let’s look at both of the DSPP options:

1. Buy $250 of XOM stock direct from the DSPP: There are no fees. At the current price of $81, you would buy 3.08 shares. You’re $250 buys $250 worth of stock.
2. Automatic investment plan of $50 for 5 months: Again, there are no fees. Your monthly contribution of $50 would buy .617 shares a month.

If XOM goes up 5%, then you made 5%. You don’t have to worry about making up for fees. Additionally, you can reinvest your dividends with no fees as well. Selling your shares will cost you .12 a share, which seems extremely fair since their are no purchase fees.

Low Fee Plans

If there’s a stock you like, but it doesn’t fall under the no-cost option, there is another alternative to the Insane Fee Plans; Low Fee Plans.

Sharebuilder.com is one example; they offer two low-cost investment plans:

1. $12 per month for 6 automatic investments per month ($2.00 per investment)
2. $20 per month for 20 automatic investments per month ($1.00 per investment)

Depending on the stock, the amount you invest and the number of trades per month, the Sharebuilder program could be a great alternative.

Building a Portfolio

No fee DSPP plans and Low Fee Plans like Sharebuilder allow you to build a portfolio by dollar cost averaging the sane way. By investing small amounts every month in a solid company like ExxonMobil and other high quality stocks, you will be on your way to building a solid portfolio.

To find companies with low or no-fee DSPP plans, check the following websites. They are the official transfer agents for the majority of companies offering DSPP plans. Make sure you read the company prospectus carefully to make sure there are no fees.

• Computershare
• Bank of New York
• Mellon Investor Services

If the plan charges you a fee, compare it to Sharebuilder, it might be the cheaper way to go.

The idea behind dollar cost averaging is to repeatedly invest a set amount of money regardless if your investment goes up or down. If your investment decreases in value, you will be buying more shares at a cheaper price; if it goes up you’ll be making money on your existing investment. This is only recommended for long-term investors, so buying solid mutual funds (index funds are recommended) or large-cap stocks is suggested. Let’s take a look at an example:

In January 2006 you decide that you want to get into the “market”, and decide to invest in Vanguard’s S&P 500 Index Fund (VFINX). You have $10,000 saved and you want to invest it all. You have two choices:

1. Go to the Vanguard website, print the forms, and mail them a check for $10,000.
2. Go to the Vanguard website, print the forms, and mail them a check for $3,000 (their minimum for new accounts), and dollar cost average the other $7,000 at $1,000 a month for 7 months.

Let’s take a look at option #2:

• 2/1/06: Your check for $3,000 gets cashed, and you buy 25.38 shares of VFINX at $118.19 a share. With mutual funds you don’t have to buy shares in whole units, you can buy fractional shares (that’s the .19 part)
• 3/1/06: You’ve set up an automatic investment plan with Vanguard, so they pull $1,000 from your checking account and you buy another 8.38 shares at $119.27. The fund has gone up (from $118.19 to $119.27), so your initial investment made money, but you paid more for this month’s shares.
• 4/3/06: The fund goes up again, to $119.52. Your $1,000 now buys you only 8.36 shares. Fewer shares than last month, but you’re making money on your past investments.
• 5/1/06: You’re a stock market genius! Your mutual fund is up to $120.33 a share. However, your $1,000 is now only buying 8.31 shares.
• 6/1/06: What’s going on? Your fund dropped to $118.78! You just lost money! Actually, you didn’t lose anything, unless you sold it. Markets go up and down. That’s why averaging works. Your $1,000 now buys 8.41 shares
• 7/3/06: Again, your fund drops. This time to $117.93! You’re asking yourself, “What did I do to deserve this?” Your $1,000 buys you 8.47 shares. You are able to acquire more shares, as the price drops.
• 8/1/06: Now I’m getting worried! The fund drops again. This time to $117.17 a share! The good news is that your $1,000 is now buying 8.53 shares vs 8.47 last month.
• 9/1/06: You’re a stock market genius again! The fund jumps to $121.15 a share! You’re making some serious money on your past contributions to the fund, but your $1,000 only buys 8.25 shares.

Your investment increased in value when it went up, and you were able to buy more shares when it went down. Dollar cost averaging allowed you to buy at an “average” cost over time. After you finish investing your $10,000, you may want to add $100 a month to the fund to increase your position. Again, dollar cost averaging your investment.

Even though dollar cost averaging reduces risk, there is still some risk involved. As you can see from the chart below, if you started the above scenario in February 2000, and continued with your $100 monthly investments, you would have been buying shares in a fund that consistently dropped in price for about 30 months. The shares you would have purchased on 2/1/2000 would not have broken even until December 2007. However, all those shares you bought on the way down would have recovered earlier. For example, shares purchased in January 2002 would have started to turn profitable in early 2004 and then again in early 2005. Overall, your “average” cost would be lower than making one purchase in February 2000, so your overall portfolio value would be higher.

Dollar Value Averaging

Though there are lots of supporters of Dollar Cost Averaging, there are also many critics. Some critics have come up with an alternative called: Dollar Value Averaging (DVA).

In DCA you invest the same amount through a series of recurring purchases, regardless of the price. With DVA you set a dollar target for your portfolio balance to increase regardless of market fluctuations.

Using the previous example, let’s say you want the value of your VFINX mutual fund to increase by $1,000 every month:

• 2/1/06: Your check for $3,000 gets cashed, and you buy 25.38 shares of VFINX at $118.19 a share, as before. Your fund starts out at $3,000.
• 3/1/06: The target value for your fund this month is $4,000 (a $1,000 increase from last month). The fund price increased from $118.19 to $119.27. So your balance is now worth $3,027 (25.38 shares x $119.27). You’ve made $27. Since you want the value to increase by $1,000 each month you only need to invest $973 ($1,000-$27). You’ve just added 8.15 shares ($973/$119.27), for a total of 33.53 shares.
• 4/1/06: This month’s target value is $5,000. Let’s assume the fund drops to $118.50 this month. The value of your fund is now $3,973. You need to invest $1,027 to keep the value of your fund at the target $5,000.

Value averaging is more work than dollar-cost averaging. “It makes you do some math every month,” says John Markese, president of the American Association of Individual Investors. The advantage to dollar cost averaging is that you can set up an automatic payment plan from your checking account and forget about it.

Dollar Cost Averaging with Stocks

Most mutual funds were designed for dollar cost averaging. They make it easy for you and don’t charge a transaction fee for each purchase.

If you try dollar cost averaging stocks by buying them the traditional way, through brokers, you’ll be losing money before you start. If you invest $100 in a stock, and pay your broker $9.95 in commission, the stock needs to rise 10% before you break even!

Sharebuilder.com resolved this by offering two low-cost investment plans:

1. $12 per month for 6 automatic investments per month ($2.00 per investment)
2. $20 per month for 20 automatic investments per month ($1.00 per investment)

These plans work well if you want to invest $100 or more per month, per investment. For option A, a $2 charge for $100 a month would be a 2% transaction fee. For option B, it would be 1%. An investment in option A lower than $100 would increase your transaction fee to higher than 2% and not be worth the hassle. Most solid mutual funds have expenses set at 1.25% or lower. One of the lowest fees around, the Vanguard S&P index fund we used as an example above, is set at .18%.To make this work you would need to invest at least $100 a month per investment; in option A that’s $600 a month (6 stocks), in option B $2,000 (20 stocks) a month.

Another option is buying stocks direct, without a broker. Yes, you can buy stocks like Bank of America (BAC), ExxonMobil (XOM), and Pfizer (PFE) direct from the company with no fees.  For more detailed information read our article; Buying Stocks Without A Broker; The Sane Way.