Stock Market Insights: Steady drip

DR. RICHARD BAKER, AIF®, is the founder of and an executive wealth advisor at Fervent Wealth Management. https://www.facebook.com/Dr.RichardBaker

A steady water drip can drill a hole through a rock over time. There is power in a steady drip. This timeless truth was written about as far back as the fifth century when classical writer, Choerilus of Samos, wrote, ‘with persistence a drop of water hollows out the stone.’ There is a great investment strategy in this thought as well. It’s the consistent investing of the same dollar amount on the same day each month or quarter automatically in what is called Dollar Cost Averaging.

Marketwise, February was disappointing, with the S&P 500 Index being negative 2.3%, according to LPL. Investors might need to be encouraged to stick to their investment plan. The markets still have a list of worries, sticky inflation, rising healthcare and housing costs, and a Federal Reserve that isn’t quite ready to stop raising interest rates.

Even with these difficulties, investors shouldn’t give up on stocks. Especially long-term investors still saving for retirement need to invest in a portfolio overweighted to stocks.

One timeless way to do that is through dollar-cost averaging in investment portfolios. This is where you have recurring contributions, of the same dollar amount, over a consistent time period.

With the market going up and down each month, sometimes you will buy shares when they are low, and sometimes you will buy them when they are high. When prices are low, you buy more shares because they are cheaper per dollar, lowering your average price per share.

The greater the swing of stock prices, the greater the opportunity for gain because you are ‘buying the dips’ (purchasing more stocks as prices drop). This strategy is similar to the power of a consistent and steady water drip.

I like the illustration John Maxwell, a famous leadership author/ speaker, used to explain consistency. He said, go out in your backyard, pick a tree, and hit it five times with an ax. Then, go to the same tree and hit it five times with your ax in the same spot tomorrow. Repeat this every day with the same tree, the same spot on the tree, same five hits. If you’re consistent, eventually, that tree will fall.

The same principle applies to investing. Decide how much you can contribute to your investments and be consistent with it. If you’re consistent, your goals could be within reach.

Have a blessed week!

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