Thursday, October 09, 2008

The Great Depression, Dollar-Cost-Averaging

If you are not interested in hearing more of my financial insight, stop reading now and skip this post. As is still the case with much of the past two weeks, everyone seems to have put genealogy on the back burner. I am going to make a good genealogy post after this one but, for now, this is what was on my mind...

I heard something on the radio last night that was pretty good. The commentator on NPR was talking about a possible depression because stocks had dropped around 30 percent, comparing what we are going through with the depression of our grandparents era. The expert on the phone told her that she was pretty much crazy! The expert noted that the stock market back then fell 85-90 percent and that there was no comparison between the two. I really did not know that the "Great Depression" was even that great (and I was a history major in college)! I am feeling pretty good about the markets after hearing that statistic.

I also heard someone say on NPR this morning that we really have not lost a dime, that all of the losses are on paper. If you think about it, he was correct. You have not lost anything until you actually cash out. I guess that supports the theory of riding it out as long as possible.

I am actually trying to put more money into the stocks that I already own, buying more shares for less money. This is called dollar-cost-averaging. If you bought one hundred shares at $50.00 and then fifty shares at $25.00 you now own 150 shares and paid only $6,250.00 for all of them. Your average investment per share is $41.67. You could therefore wait for the stock to rebound to only $42.00 and not lose anything, despite paying $50 for more than half of your shares. This is how you make money with the stock market (or at least reduce some of your losses). A good drop in price is healthy some times. (Maybe not this much of a drop but there is money to be made if you play your cards right)!

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