My Argument for Dollar Cost Averaging

I've heard a lot of talk recently about Dollar Cost Averaging in the last year, though I hadn't seen the numbers. First of all, a short explanation on DCA. The idea is to put the same amount of money into your stock account every month (or week, quarter, year), no matter what. The reasons are:

1. It helps you remember to put money in regularly, and moving toward your retirement.
2. With a promissory letter to the fund, you can start with lower amounts than normally needed - some ask for $5,000 minimum OR $200 a month.
3. If the fund is going up and down, you'll buy more shares (same overall cost) in down months.
   

I didn't really get the power of #3, and I'm a number person, so I decided to see for myself. The following took about 10 minutes to throw together in Excel, and is really indicative of the power of DCA.

Invest $50 a month
Fund price	Amount	Shares
$20.00	$50.00	2.50
$19.00	$50.00	2.63
$18.00	$50.00	2.78
$17.00	$50.00	2.94
$16.00	$50.00	3.13
$15.00	$50.00	3.33
$14.00	$50.00	3.57
$13.00	$50.00	3.85
$12.00	$50.00	4.17
$11.00	$50.00	4.55
$10.00	$50.00	5.00	50% loss
$11.00	$50.00	4.55
$11.00	$50.00	4.55
$11.00	$50.00	4.55
$12.00	$50.00	4.17
$12.00	$50.00	4.17
$13.00	$50.00	3.85
$13.00	$50.00	3.85
$13.00	$50.00	3.85
$14.00	$50.00	3.57
$14.00	$50.00	3.57
$15.00	$50.00	3.33
$15.00	$50.00	3.33
$15.00	$50.00	3.33	still down 25% after two years
Totals	$1,200.00	89.09
	$13.47	Price per share
	$1,336.34	Current value
	$136.34	Profit !
	22.7%	ROI

This is based on the fact that I started with $0 and ended with $1,200 invested, so on average had $600 in the market. How would that look - at the end of 2 years and a 25% decline in stock price to be up almost 23%? On the other hand, a steady increase in stock prices and your gains lag, since you keep buying stock at higher and higher prices. And it only helps you lose less on a steady decline.

Mark Cuban's Personal Stimulus Plan

This is too interesting a story to pass up. Have you got a good idea for a business? Do you have a business already that's ready to go to the next level? Introducing Mark Cuban's personal Stimulus Plan. For those of you who don't know, Mark Cuban is the owner of the Dallas Mavericks, a thorn in the NBA's side (in a good way), and internet billionaire. He's one of my heroes, and you'll understand why if you hear his story. It doesn't mention his big Options play, but that was huge too - I'll write about that some other day...

Mark Cuban is running his own stimulus package. He is looking for interesting companies or start-ups (preference is on the established ones) to invest in. The rules are on the first link I posted, but basically you have to have a solid business plan and be willing to bare it all on his site. This way, we all can see what's going on and learn. I have had a great time reading through some of the ideas. He says he's received over 1,400 of them and read them all. I love this article, because it illustrates several key ideas that we all need to understand:

1. The rich get richer because they take the time and let good deals come to them. Then they spend the time to make sure.
2. Looking back, we will see this as one of the biggest opportunities of our lifetime. Sure many people will have a hard time, but many people will come out of these economic times much stronger.
3. You get rich by creating value. Cuban will be richer at the end of this, but by helping other people become richer too.
4. Wealth is not a zero-sum game. You can get rich without making other people poorer, and in fact most have. Many of our richest people have enriched the lives of thousands in the process of getting there themselves.
   

So let's take the lessons of Cuban and enrich those around us, creating our own prosperity on the way. And if you have an idea and post to his Stimulus Plan, put a link in the comments so we can all read about it.

Mine? I'm thinking...

A Eulogy: the Penultimate of Goals

I just realized that every, and I mean EVERY, book I've read on success, investing, and business always has a section on Goal Setting. It doesn't matter if the author is a steady investor, a speculator, or Rich Dad - they all say that without goals, it won't happen.

Yogi Berra says, "If you don't know where you're going, how will you know when you get there?"

More on actual How To for goal-setting later. First, I want to talk about a part of goal-setting, the Eulogy. The exercise goes - imagine you're sitting at your own funeral. People are getting up and talking about your life and how you affected them, giving eulogies. What would you like to be remembered for? What do you want people to say about you? Write for them - what would you like the following people to say:

1. Your partner or spouse
2. Your child
3. A co-worker or business partner
4. A stranger, someone who barely knows you
   

Now, I've thought about this a bit but never really did it. About five months ago, though, I saw the perfect example, with Paul Newman's passing. Read through that article - it's amazing. And look back at the list above.

1. Married 50 years in "one of the most successful marriages in Hollywood"
2. Newman's daughters described him as a devoted husband, a loving father, an adoring grandfather and a dedicated philanthropist.
3. Awards and kind words from co-workers and Hollywood in general, including an Oscar
   
4. Some 135,000 children have been able to go to summer camp for free because of Newman's Own
   

Any one of those would be a great accomplishment. All four, and more!, is absolutely amazing. For more on his entrepreneurial success, read here and this book, here.

So what would you like people to say about you? That you 'got by'? That you 'did okay'? Settling for getting by is aiming for mediocrity. And once you know where you're going, it's much easier to recognize the road signs. It's time to sit down and write out what you want to be known for, and start making it come true.

Lessons From a Global Economy

For the last two months, I have been working online for a meeting place of employers and providers called oDesk. To see more about my thoughts on oDesk, look at my other blog.

One of the main issues new providers have with oDesk is that you are now competing with people who can live well on $10 a day. They often scream 'Unfair!' and either ask oDesk to set a minimum wage or expect a lot and sit around waiting for it. oDesk isn't about to set a minimum wage, so they sit. And sit. And sit...

Since I'm obviously in the same position - competing with people who can make 1/5th what I can, I did some research in the meantime. One part is that I've been willing to build - one person I read asked why he should be willing to work for less than he gets paid locally. While he's holding out for someone to take a chance that he's worth it, I've already clocked 40 hours. I started low, put in some work, and reference these blogs as much as I can. So first I worked for under $2 an hour, then $10 an hour for one hour's work and a good reference, and now $14. As I learn more about writing copy, I expect this to continue to rise.

The full answer, interestingly though, is to brand yourself and stand out in your niche. I know enough about computers, write well, have been published online and in a magazine in Taiwan, and have some specialized interests and strong points. I've been around computers, but am not an expert - and that's a lot of why I have my current job there. This same idea is true in other job markets, and in general. At first I didn't understand what they meant by "don't be a commodity." Now I do.

A commodity is a thing. Since the same 'things' are pretty similar, difference is made through looking nicer, being bigger, and costing less. So if you want apples, you'll pick the biggest, pretties, and cheapest of a type you like. On oDesk, if you're looking for a basic job done, volume and cost are what you're looking at - a commodity.

On the other hand, if you're looking for a special job - other things become important. The writer's style, ability to communicate and get you exactly what you want, or their knowledge that will predict issues you haven't even thought about yet. All of a sudden, they're paying for services, style, and specialties. And as everyone is different, you're not a commodity - not trying to be the biggest, cheapest apple around. Now, you get paid based on what your skills are worth, instead of the same as the cheapest person out there, because there is no one else to compare exactly to.

As we get into a time of high unemployment, and a market that favors the employer, remember this. Instead of trying to be the best deal around, brand yourself. Get hired because you're the one who's different, and can offer your boss something no one else can. Establish a specialty, and be remarkable. Look at books like The 4-Hour Workweek or Automatic Wealth. Find something that truly sets you apart from the rest, and let them be apples while you're something different. And then get paid what you are worth, not the 'going rate' for a body.

Poll Results

The survey for January was: What Are Your Plans For Your Money In 2009? The results were all about paying down debt. Now, given there were about five participants, that doesn't mean much, but it is interesting.

There's a concept called 'expensive money', and it's based on how much you have to pay to borrow money - i.e. interest rates. If interest rates are high, you have to pay more to borrow money, and if they're low, you pay less. Talking to long-term investors, the break-point is around double digits. If you can pay less than 10% on borrowed money, it's pretty cheap. If interest rates are higher, it's expensive.

In What Is an Investor, I put forth that an investor is a person who understands ROI, implying that they'll be on the winning side of that comparison. So as an interesting aside - if under 10% interest is considered 'cheap', then that implies a professional investor is confident that they can make over 10% on their investments. Otherwise 'cheap' would have a different level.

Now, most people out there can get interest rates under 7%, and many can get under 6%. This means that money is quite cheap. And yet people are still looking to pay down debt... So this survey tells me two things:

1. That fear makes cheap money still look risky.
   
2. That those surveyed are not professional investors, or have too much debt already.

What Is an Investor?

It's time for a definition. What EXACTLY is an investor? In this article, I stated that an investment IS a sacrifice. So if an investment is a sacrifice, what is an investor? The best answer I've come up with is that an investor is a person who earns a better return than they pay.

This means that an investor is a person who understands ROI. This also means that a person who buys a house with a 7% mortgage, and makes money renting out the property is an investor. A person who buys a home to live in? Only if that's cheaper than renting. A person who rents out a house for a loss? Not an investor! Unfortunately, I fit into that last example pretty well right now...

That also means that a person who buys stocks and waits for them to go up, or is selling now that they are dropping is NOT an investor. They're speculators, which is another word for a gambler. Same with the person banking on appreciation in their house. Not that there's necessarily something wrong with that, but this site is "dedicated to not daydreaming through life", as I say at the top... Let's see what's really happening here.

Most "investors" are really traders, and that is a game or a job, depending on how they approach it and whether they make money or not.

Funny thing, by this definition, Warren Buffett is an investor - as he buys undervalued assets that will pay a better return on his investment than he is paying (or could get elsewhere). But the people who own his stock (BRK-A or -B) are not, as it doesn't pay dividends and we're just expecting (or hoping) it will go up...

Emotional Costs

I recently wrote on this article on Get Rich Slowly that "This is the cost of emotion - if you didn’t have that reaction, you could save money." In retrospect, I think that sounded more negative than it should have. In my article last week, Making the Most of Productivity, I put forth that we might want to look at our productivity in financial, emotional, spiritual, mental, and physical areas.

So let's look at the other side: FESMP (an abbreviation of the areas above) costs. As I said, emotion has a cost - in the example, people were willing to give the government an interest-free loan (paying extra taxes for a big refund) because they knew wouldn't manage the money as well. So because of this emotional soft spot (not being able to stay firm in saving that money), they paid in lost interest.

Another example, from the Seven Laws of Money: the author(!!!), a financial planner and author, saved $2,000 by borrowing $2,000 from another bank, putting it in a CD, and paying the loan back. He only lost a little bit, on the spread between the rates, but he's a financial planner, and that's the best he can do??? Emotional cost.

Then I got to thinking about it... People pay for membership in a gym - physical cost. People give money to their church - spiritual cost. People get sick and take days off of work - physical cost. People take holidays to recharge - mental cost. By spending money, we save in other areas, by spending in other areas, we save money. Think of staying late to get extra work done - you make more, but you cost yourself physically and emotionally.

Looking at it now, I can't see an example where 'mind' and 'emotion' aren't being used interchangeably. Should I have two categories or just one?

It would be a good practice to sit back and look at your 'wealth' in each of these areas, and the 'exchange rate' between them. It's interesting that, as we get low in one area, we are often willing to buy it at a premium, and as we get high, we are willing to sell at a discount. Think of the rich man in poor health, and what he'll be willing to spend to be healthy again, or the other extreme - the poor young man willing to work 70 hours a week to make lots of money.

• Where are you wealthy, and where are you poor?
  
• Are you balanced?
  
• If you made a pie chart with these five (four?) areas, what would it look like?