Investing

Invest $100 a month in stocks for 20 years

With a 20-year investment perspective, you are considered a long-term investor. Put your money into the stock market, either directly or through a mutual fund that includes stocks; the value of your investment may fluctuate, but over a longer time horizon, your average return will be higher than what safer options can offer.

Your stock or investment fund might be up 11% one year, down 6% the next, then bounce back 9%, and so on, so it’s definitely a better bet than a safe and predictable option like a savings account or certificate of deposit A bumpy ride (CD). However, when 20 years have passed, you are almost guaranteed to be ahead of the actual amount in your account.

Safety comes at a price, and risk pays you a premium. Since you don’t have to lose sleep over a particular year’s stock market crash, you can get a premium, with the long-term horizon offsetting most of the risk.

key takeaways

  • Long-term investors have a time horizon of at least 20 years; this time frame allows them to avoid prudence and instead take measurable risks that will ultimately pay off in the long run.
  • Dollar cost averaging is a smart strategy for long-term investors because it involves investing a certain amount on a regular basis, usually monthly, regardless of market performance or the strength of the economy.
  • Buying stocks and funds that offer dividends is another great method used by long-term investors, as is automatically reinvesting those dividends.
  • Compounding interest is a huge advantage for long-term investors, where returns from an asset are reinvested for greater returns over time.

dollar cost averaging

With dollar cost averaging, investors set aside a fixed amount on a regular basis, regardless of other circumstances. A classic example is a 401(k). Dollar cost averaging is a technique often used by long-term investors.

If you invest a certain amount each month, you buy stocks in good times and bad. During boom times, your stock value increases. For example, let’s say you start out buying a stock fund that costs $20 per share. You decide to invest $100 per month. So that means you get 5 shares for $100. A year later, the fund performed well and the stock rose to $25. Now you only get 4 shares for your $100, but you’re still happy; five shares appreciated in the first month a year ago, 5 x $25 = $125, a net gain of $25. In the second month, the stock price is $21, so you get 4.77 shares for the month, a net gain of $19, and so on. In good times, you get fewer shares, which reduces potential future upside, but it also means that your total investment returns are good.

Suppose the stock price falls from $20 to $15 in the first year. You lost 5 x $5 = $25 on your first month’s investment. In the second month, you buy shares at $19 per share, which means you get 5.26 shares. Then the second month’s loss becomes 5.26 x $4 = $21, and so on.

While this loss is certainly heart-wrenching, you get shares for less than your initial purchase price and end up with more shares for your $100 monthly investment. With the share price at just $15, you can snap up 6.67 shares per month as long as the slump lasts. When things improved six months later, you bought 6 x 6.67 = 40 shares where you might be at the bottom. Then, even with a small rebound to $18 per share, you’re now making 40 x $3 = $120 from those penny stocks alone. At the same time, the loss from the first month was reduced to $10, the second month to a little more than $5, and so on, which means that you have returned to profit in revenge. When the stock price returns to its original $20, the initial loss is completely wiped out, and the 6-month gain on the penny stock grows to 6 x $5 = $200.

If you stay calm and stick to your plan even in a down market, you’ll get more stock. When the market rebounds, these additional stocks increase investment returns. Despite the temporary ups and downs of the market, it’s also a big part of the reason why the average stock investor earns higher long-term returns than safer investments.

dividend

Many stocks and funds also pay dividends to investors. Dividends are essentially profits given to owners (shareholders), providing several additional returns on top of regular share price increases. Most mutual funds and stocks offer the option to automatically reinvest dividends. This is done in good times and bad, which means you get an average dollar cost, which is effectively an invisible boost to your regular investment plan.

Through compounding, the earnings of an asset are reinvested for more earnings; profits are generated when the investment yields both the original dollar amount and the earnings accumulated up front.

math

Suppose you decide to invest in a mutual fund with an average annual return of 7%, including dividends. For simplicity, assume that compounding occurs annually. After 20 years, you will pay 20 x 12 x $100 = $24,000 into the fund. Compounding returns, however, will more than double your investment. An easy way to work out the numbers is to use a calculator, but you can do it manually by adding the new year’s contribution to the old total, then multiplying each year’s new total by 1.07.

Related Posts

1 of 2,105

Leave A Reply

Your email address will not be published.