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I THANK MURTHY, a friend at college, for teaching me guitar. Instead of theories, he taught me five easy chords. I could soon play a few songs and that fueled my motivation to learn more.
The same strategy can help beginner investors. Novices often find the stock market intimidating and mysterious. Result? Inaction and opportunity cost. Solution? Simple steps.
A former coworker comes to my mind. He was uninterested in stocks, including the company shares he received as part of his pay. He sold the shares immediately—often the smart thing to do—but he didn’t know what to do with the cash.
For people like him, a simple solution is a fund like Vanguard Total World Stock ETF (symbol: VT). No need to research individual stocks. All my friend had to do was sell his company shares as he received them and then buy this fund. Over time, his interest in investing grew, and he’s no longer ignorant about the stock market.
Another example: A friend’s daughter needed help with investing. She learned fast and decided to invest equal amounts in four commission-free index funds. She adopted a shortcut for rebalancing. Whenever she had money to invest, she’d buy the fund with the lowest balance. Was this the best strategy? Maybe not. But it works for her.
My last example: A recent acquaintance had a large sum sitting in her bank account for years. She was too afraid to invest and too embarrassed to ask. After we chatted a few times, she realized that—while she was avoiding risk—she was also avoiding return. She decided to start investing in small installments, but invest less if stock prices were high.
To keep things simple, she transfers just enough from her bank each month so her investment account reaches a fixed dollar target. If she started with $1,000 in the first month, she’d top up her account’s value to $2,000 in the second month, $3,000 in the third and so on. This way, she buys less when share prices are up. It’s a simple strategy that she’s happy with—and it offers the somewhat contrarian approach offered by value averaging, a version of dollar-cost averaging.
Fun article Sanjib. I resonate with the last example. I like hitting milestones – must the project engineer in me. If an account is a few hundred dollars short of some big number I would send an unplanned deposit to break the threshold, even though I had a planned deposit the next month. If our mortgage was about to break a big threshold, I might send in an extra payment to break the threshold earlier.
My favorite thing is making a charitable contribution that tops the goal amount. I have lots of nieces, nephews, and great nieces and nephews that are involved in any number of charitable events. If their goal is to raise a $1000, I’ll watch the site to see the total amount raised, and when the difference gets close to the amount I was planning to give, I make my contribution to put the total over the top. I’ve convinced myself I’ve adapted my competitive nature to good causes!