Monday, July 14, 2008

Havoc

There is a lot going on in the market the past few months. A lot of people who have money invested in the market are seeing the value of the accounts dropping dramatically, 10-20%. Thats a real tough pill to swallow and I am sure plenty of people are getting very scared and pulling out of the market. That could be a good idea, so that you will not lose any more money, and if you switch to risk free money market maybe you can continue to make 3%.

If you do though sell out there are a few things you could be missing out on; Dollar Cost Averaging (The technique of buying a fixed dollar amount of a particular investment on a regular schedule, regardless of the share price. More shares are purchased when prices are low, and fewer shares are bought when prices are high), in this case you can either keep investing money as the market goes down, or you can stop adding new funds, but have your dividends reinvest in the stock of the company that may be going down or at least not going up!

That can really make a big difference years down the line, if you don't have to live off of your dividends (some older, retired people may bank on those dividends coming quarterly to buy groceries or pay insurance bills) its a great way to keep investing. I mean think about it, say you own 25 shares of BAC, and every quarter you get paid out $16 in dividends, what are you going to do when a $16 check comes to your door? If it were me, I'd throw it in my checking account and spend it as I would any other money in the account, but really...what is $16 going to get you? Well, if you switch your investment to reinvest your dividends, that $16 will buy more shares of BAC every time it is paid. SO, for those of you that would have spent it, you would most likely have nothing to show for it, but those who had the dividends reinvested, you could have many more shares just a few years down the line, practically for free (all depends on how you look at it).

So, you can either bail out of the market and switch to risk free, or you can do as a Warren Buffett, Bruce Berkowitz and many other value investors would do, and buy when its low and sit on it for a long time as it comes back up.

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