Tiptoe Into a Cool Pool of Money

May 15, 2009 - PRLog -- Generally there are two ways to enter a swimming pool: the Big Plunge and the Tippy-Toe. The reason for the latter approach is excellent: that water could be cold enough to temporarily stun a swimmer.

   The Big Plunge (a.k.a., a never-mind-the-consequences-running-jump into the pool) is employed by the fearless diver who is not discouraged by temporary paralysis. Some investors rightly take the Big Plunge approach to investing. An investor with an long-term planning horizon (e.g., north of ten years) and a will strong enough to subvert the chill of icy waters should use the Big Plunge approach to investing. Incentives often tendered by investment companies help turn that chilly water to a balmier temperature. However, this approach to investing is best employed when the market shows signs of heating up, rebounding based on sustainable, bona fide, economic factors (e.g., venture capital activity swells, production of building materials intensifies, consumable goods proliferate, or unemployment decreases).

   With the Tippy-Toe approach, in contrast to the Big Plunge, the swimmer cautiously enters the pool, slowly acclimating to the water temperature. An investor of this type, like the swimmer testing chilly waters, prefers to gradually, systematically invest securities into the stock market to provide the necessary time to assess and analyze how the stock market is trending. Dollar cost averaging (DCA) is this investor’s equivalent of the tiptoe into the pool. DCA enables an investor, who expects the stock market to eventually correct, but simultaneously anticipates volatility in the short term, to invest without fear.

   What is Dollar cost averaging? DCA is the systematic practice of purchasing securities at planned, precise intervals with predetermined sums of money. This technique of investing reduces the investor’s exposure to the risk involved in committing assets to one massive purchase of securities. With DCA’s methodical investment schedule, an investor purchases more shares at a lower rate, which reduces the stress involved in investing in a volatile market. It is true that the possibility exists that the investor will not buy all of their shares at the absolute bottom, which would maximize the shares purchased. However, guessing when that absolute bottom share price will hit is highly speculative, and, thus, risky. The cautious investor should leave this guessing to the investor willing to take the Big Plunge into pool.

   By employing DCA an investor can tip-toe into the water slowly instead of taking a big plunge.

The above article was created by the professionals at Generations Financial Services. They can be contacted at info@generationsfinancialservices.com or at 800-260-1615.
Generations Financial Services, Inc./SagePoint Financial, Inc. branch 44350: 660 Veteran Ave. #321, Los Angeles, CA 90024.

Securities and investment advisory services offered through SagePoint Financial, Inc., member FINRA/SIPC and a registered investment advisor. Generations Financial Services, Inc. is not affiliated with SagePoint Financial, Inc. or registered as a broker-dealer or investment advisor.

Past Performance cannot guarantee future results. There is no guarantee that a diversified portfolio will outperform a non-diversified portfolio in any given market environment.

Periodic investment plans do not assure a profit or protect against a loss in declining markets. Such plans involve continuous investment in securities regardless of fluctuating price levels.

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Generations Financial Services is a full service firm dedicated to helping individuals and companies achieve their long term financial goals.