You may have heard dollar cost averaging and lump sum method on stock investment from the fund manager or your investment advisor. Both have pro and con.
Dollar cost averaging, where you invest your money of certain fixed amount with a frequency of time in investment.
Pro – You lower your average cost of buying stock which also lower the risk of investment.
Con – You get average return.
Lump sum method, where you invest all your money at a time.
Pro – Higher return.
Con – Higher risk because you will get higher lose as well.
The first method seems to be a better choice of investment (better return) in long term but the statistic does not agree with that. MoneyChimp.com did a study and analysis on both methods against the historical data of S&P from year 1950 to 2009. It shows that the lump sum method is better than dollar cost averaging method. Dollar cost averaging is statistically losing about two times out of three.
In my investment, I won’t use both method. I invest in a stock based on its fundamental. I buy in company share when the it is under-priced, sell the company share when it is overpriced and keep the company share as long as the company make money and growing. There is no time limit, no target price, I can buy and sell anytime as long as it meets the requirement I have set: under-priced or overpriced. I believe in this way, in long term, you will only earn and no lose.
So what is your investment method?
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