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Now that
you've created a transaction portfolio and filled it with
a year's worth of imaginary purchases (see previous article),
you have an idea about how it feels to accumulate stock. Well,
you have somewhat of an idea about what it's like to accumulate
stock, because you've just gone through the motions. You have
yet to make a financial commitment to build an investment
portfolio in real life.
I know
that making a financial commitment isn't easy. I find that
parting with my money is worse than agreeing to a blind date,
especially when I've made a further commitment to leave that
money alone for a year or two for tax breaks. The only thing
that keeps me sane about saving and investing is the ability
to watch my shares grow in my transaction portfolio.
That's
why I harbored some qualms about pushing you to create a transaction
portfolio so quickly. When you can watch your portfolio grow
in share numbers within an afternoon, you really don't get
a sense of the patience involved in dollar-cost-averaging.
Oh no. Instead, you get a nice big serving of a piece of instant
gratification.
And, when
you create a portfolio in one afternoon, you also don't get
a sense about how gratifying it can be to change a lifestyle.
So I want
you to try another little exercise. Open your transaction
portfolio and look at the first transaction that you created
and backdated to January 2006. Grab a piece of paper and a
pencil or pen, because you might want to make a few notes.
Now, close
your eyes and think about what you were doing in January last
year. Since it's tax time, it shouldn't be too hard to remember
what you purchased that month. If you can remember at least
$25 - $50 that you spent on some trivial item that either
no longer exists or that has been relegated to a closet, jot
that item down along with the cost.
Continue
to march through each month in 2006 and continue to write
down all the items that you purchased that are now broken,
discarded, or hidden away. If you have the receipts for those
items, use them to be as accurate as possible. Memories can
deceive. You might be shocked about how much you spent last
year. Money, I might add, that could be sitting in that portfolio
right now. Real money, real investments, and real accumulation.
In fact,
if you spend some more time with your stock's historic prices
and your input into your transaction portfolio, you might
realize that a regular investment plan could help you to accumulate
stocks without too much work or fear. If the stock price was
up during one month, then your consolidation compensated for
that rise in price as it averaged your first cost with your
second price. And, if your stock was lower in price the following
month, then your consolidation compensated for that difference
in price as well as it averaged your second price with your
third price. And, so on?
Some months
it may appear that you're not getting ahead at all - in fact,
the stock price per share may decrease for several months.
That downward movement, made all that much more noticeable
by the bright red color that Yahoo! relegates to negative
prices, may discourage you. But, I've discovered that as long
as the stock doesn't drop well beyond 10 percent of my original
cost, then I might be getting a bargain with my monthly purchases.
With dollar-cost-averaging, I'm accumulating stock while the
price is low, and this is a good thing. I'd rather have ten
shares than one share when investors begin to understand that
a stock is undervalued (For instance, 10 shares x $2 = $20,
compared to 1 share x $2 = $2).
So keep
your chin up and your commitment solid even when it appears
that your stock choices appear to be going nowhere. Take a
look at that transaction portfolio and see where your stock
rose or fell, and compare that movement to 2005. Compare it
further to 2004. If you see a pattern behind that rising and
falling, then maybe you've chosen a seasonal stock that follows
a natural pattern.
On the
other hand, if your stock ended up at a lower price than the
amount that you invested, you can still have heart. There
are three answers for this situation:
- Remember
that this is just one stock, and that you will eventually
diversify. Since you added two stocks in that transaction
portfolio exercise, you can begin to study how diversification
works. Go ahead and add two or three more stocks to that
portfolio to fully understand why diversification is so
important (use the same method that you used for the first
two stock choices).
- If
you really did pick a stock that decided to choose 2006
as the year to admit that its CEO was embezzling, that its
accountant was falsifying records, and that all its products
needed to be recalled, then you now know how Enron investors
might have felt. Go back to #1.
- Keep
investing. If you truly believe in that company and in
your research, your commitment may eventually pay off
as long as you practice patience.
It's that
number of shares that are important in dollar-cost-averaging.
As time passes and as you begin to see real progress in that
number, you might begin to experience some other emotions
about your investment strategy.
I'll share
those problems with you next week. In the meantime, think
about making that commitment to a real-life portfolio, because
investing in your future is often more gratifying than a blind
date. Trust me.
Until
Then,
Linda Goin
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