The Math-Based Reason to Keep Investing

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We've been experiencing a volatile market lately. The current prices of some stocks, mutual funds, and ETFs have fallen below end-of-2015 prices.

In times like these, I may be tempted to give up on investing or temporarily halt my activity. But then I consider how the math could work. And, I think about how investing may benefit me in the future if I continue to invest.

Possible Reasons Not to Invest Now

First, mull over why I may NOT want to invest right now:

  • I don't have extra cash
  • I doubt my investing abilities because the value of my investments have declined (and, when reviewing recent acquisitions, the market value of my investments may be less than their cost)
  • I feel that my timing or judgment is off; if I'd waited for a price decline to invest, I could have snapped up bargains
  • I question the “system” and think that investing just isn't right for the average person without specialized training

When I don't have extra cash to invest, then not investing makes sense. I shouldn't invest whenever I need the cash to pay bills or hold cash in reserve for an annual bill such as my property taxes.

What about the other reasons for not investing? Self doubt, regret, insecurity — I've had those feelings more than once.

I'm pretty sure I could be a better investor if I could invest retroactively. And though I believe there are ways to make better investing decisions than my current approaches (not perfect, but better), I realize that steady investing can help me realize investment gains and increase my net worth over time.

How Investing Can Work

Growing my net worth through investing is not about boosting my self-confidence, transforming my approach, or adopting a sophisticated system. For me, it's about remembering how the math can work.

From a numbers perspective, it can make sense to keep investing regularly over a long period of time, such as 10, 20, or 30 years.

Let's say I decide to invest $500 each month in a certain individual stock, mutual fund, or ETF. When I start investing, the price per share is $105 and I am able to buy 4.762 shares. The next month, the price drops and I pick up 4.854 shares. The price is down further the next month, recovers in the middle of the year, declines again, and then finishes the year below its price several months ago.

Here's a spreadsheet illustrating how purchases and market investment values can grow over time:

A Reason to Keep Investing
This spreadsheet is an illustration of what could happen; actual results will vary.

In this illustration, the total value of my $500 monthly investment ($6,000 in total cost) grew to $6050.21 — even though the per-share price of my investment dropped from $105 to $99.

Note that this spreadsheet shows some of the math behind “dollar-cost averaging,” meaning that the cost of shares are averaged over a certain period of time. In this case, the average cost per share is about $98.17 and the value per share is $99.00. I'm not recommending dollar-cost averaging over lump-sum investing here but showing how investing over time may work even when prices fluctuate.

Costs and Other Factors Can Affect Investing Results

Trading fees and other costs can affect results.

This illustration doesn't account for the cost of investing (price of shares + investment fees), which could exceed the value of my investments at year end. For example, if my stock trading fee is $5, then it would have cost me $60 in one year to acquire these shares, a dollar amount that exceeds the growth in the investment.

However, on a  positive, note, if I had invested in a no-transaction-fee, no-load mutual fund or commission-free ETF, I could avoid trading fees.

In addition, generally I can't buy fractional shares of an individual stock or ETF — unless I use a direct stock purchase program or a unique brokerage service like a dividend reinvestment program.

However, I can invest a flat amount monthly in mutual funds, managed portfolios, and robo-advisory portfolios (such as Betterment) if I meet investment minimums.

Steady Growth Happens But Isn't Guaranteed

Investing doesn't always follow a neat pattern of growth or minimal fluctuations, as this illustration suggests. On occasion, I have bought stocks that rise, then fall, decline, plummet, and decrease more.

For example, GoPro is trading at $10.60 as I write; the stock price was over $60.00 in August 2015. I don't follow this company so I can't tell you whether the price will rebound. But I can say that prices of some stocks fall and never recover. In those situations, the math means that my investments will decline in value — even if I buy $500 worth every month for several months in good times and bad.

The Math Can Mean Growth

Still, I've learned that if I steadily invest in a company that is well-managed, profitable, and has shares that grow in value over time, moderate short-term fluctuations don't affect my long-term goals. And, in some cases, those dips can be financially rewarding as I can acquire more shares when the price is low. If the economy continues to grow over the next several years, I may be happy later that I did the math and continued to invest even when the market was down.

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