Even though we write about personal finance, there are things we don't fully understand. And that's okay. We understand enough of the basics. There are some highly skilled technical types in finance, and that's okay. But that is not where most people are.
That's not us.
We are pretty simple, and any process we put in place - whether career, budget, saving, investing, planning for retirement - all of it has to be simple. If it's too hard to understand or too hard to do, we just won't do it.
So what is the one simplest thing you can do in investing? Assuming your cash flow is positive, your budgetma is working, and your retirement savings plan is on track. Here it is: dollar cost averaging.
Suppose you are at the grocery store, and you see that the cereal you buy every week is on sale. What do you do? You buy more because the price is low. Your dollar buys more only because the cereal is cheaper.
But in investing most people who are actively buying and selling get excited when prices rise and sad when prices drop. This is opposite of what those same people do at the grocery store, and it's not really logical.
So how do you take out the emotion? Automation. If you set up an automated investment, even if it's only $50 a month, then your emotions are not involved. If the market goes up, that's fine. If the market goes down, you buy more, even though you are spending the same $50 a month. Over decades this is proven to be the one simplest investing strategry that has worked.
This is the beauty of the 401(k) at work, if you have that option. Once it's set up on autopilot, most people don't make any changes, and that is the best way to do it.
Dollar cost averaging won't work without automation. But if it's set up properly, then you really don't think about it. When the market goes down, you can relax knowing you are buying more shares.
It's the one thing you can do if you don't do anything else.
Nice and easy.
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