Basic Concept on Investing

Basic Concept on Investing

Sometimes I totally forget that I’ve been in the field of financial advice for as long as I have.  In doing so, one of the hardest things to remember is that the knowledge I’ve accumulated isn’t as obvious to others as it is to me.  Think about your field for a moment, you are probably very good, if not an expert in it, at this point.  When you talk to others about your profession, it is hard to try to tell yourself, oh wait they don’t know what the heck I’m talking about. 

I saw this trend happen repeatedly as we were building our new office building, which is awesome by the way.  Every conversation with the builders they would throw some name or acronym around like we had any clue what the heck they were talking about.  We had to constantly stop them and say, “Hey, what do GMP and ABC stand for?”

Dollar Cost Averaging

I bring all this up as last year I was reminded of this quite a bit during the market turmoil we had in 2022.  One of the unique circumstances I found myself explaining, more than I would have thought, was the concept of dollar cost averaging.  More specifically, the question kept coming up as to why people should keep buying into the stock market when every day it is less and less.  I found this interesting as I kept telling myself that is exactly why you should keep buying into the stock market.

I had this question brought up on, what surprised me, on numerous occasions.  A client would walk in, and we’d be doing a review of their finances.  We’d chat about what they are putting into their 401(k) and I would get the response, I stopped contributing because it was like putting good money after bad.  They put in $1,000 the next day it is worth $950.  Seemed like insanity to these individuals as they could put it under their mattress and be better off.

Now off the bat, I have to say I get this point of view.  If I said give me your $1,000 and I’m going to put it in the bank for you for safekeeping.  The next thing you know I deposited $950 it would literally be the definition of insanity. 

Investing is Different

However, when it comes to investing this logic does not hold water.  You see when you are investing there are a couple of major differences and some basic understanding one must abide by.  For starters, you aren’t putting your money in a bank when you buy into the stock market.  Instead, you are buying ownership into what potentially is the largest, most well-run, best talent, key to our economy companies in the world. 

Next, when you are purchasing shares in these companies, whether directly or through a fund or index, you are buying a percentage of outstanding shares.  For the most part, companies issue a fixed amount of ownership shares in their companies for public consumption.  This is an important nuance to understand as it simply means each share you purchase makes you a greater percentage owner in the overall enterprise. 

The biggest concept to grasp is that when stock prices go down, and you are still investing the same dollar amount, it simply means you are buying more shares.  For instance, if I am investing $1,000/pay into some company and the share value today is $1,000 then simply put I own 1 share.  If tomorrow those company shares are trading at $100/share and I put in the same $1,000 I now own 10 shares. 

In a perverse world when purchasing stocks, you want it as low as possible and when owning stock you want it as high as possible.  Should also ask yourself if you believe this company is worth 90% less in the long run due to a temporary market downturn. 

In an ideal world you’d buy all your stock at the lowest price imaginable or at a discount, think buy low sell high, and while owning it you’d hope it was the highest price imaginable.  The irony here is that if you are constantly and consistently buying into the markets some environments are better for the purchasing and some environments are better for the owning of these stocks. 

It’s Counterintuitive

What I am essentially saying is that the worst time to STOP buying into the markets is the exact time it feels futile.  When you see your money go down and down and down, is could literally be the ideal time to buy, buy, buy.  Think to yourself how much more you are acquiring at a discount from these incredible companies.  Intuitively it makes all the sense in the world, emotionally it certainly can be a demoralizing act. 

Coming full circle here, our job is to help educate and remove the emotional aspect of investing and one’s finances.  We need to remind ourselves not to take the knowledge and expertise we have for granted.  It can be very easy to try to impress our clients with our vast knowledge when often all that is needed is a calm steady hand to explain fundamental concepts in a caring and thoughtful way.  I believe that is what makes all my colleague advisors here at Diversified so wonderful is their willingness and the care they take in making all our clients/friends feel empowered.

As always stay wealthy, healthy, and happy.