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DRIPs: The Best Method For An Investor To Get Used To Individual Stocks
Posted on | May 18, 2011 | Comments Off
Personal finance experts like Dave Ramsey often recommend against buying individual stocks. They say that it’s impossible to know enough to make wise choices on what stocks to own and which to avoid. Instead, they prefer buying mutual funds or ETFs which hold baskets of stocks - in essence, spreading your bets over many companies so that you can’t get too hurt by any one company.
I definitely don’t prescribe to this investment approach (not that it’s necessarily wrong), but prefer to do more work and find outperforming companies that I can hold long-term.
Dividends give you a leg up on this process, and DRIP plans get you a further leg up. Let me explain…
First, dividend investing is a wiser approach especially for new investors as high yielding dividend stocks tend to be more established, mature companies. These companies are often less volatile than the latest and greatest tech stock that has hit the market. And, they frequently receive less attention from the masses which can help prevent buying at high valuations.
Secondly, DRIP plans enable you to build positions over time rather than allocating a chunk of money at once. When allocating all your money at once, you face the risk of buying all your shares at a top in the market and losing money. DRIP plans enable you to invest on a regular basis, buying shares and dollar cost averaging.
Now, I do recommend combining a DRIP-monthly investment approach with irregular bulk purchases of shares at attractive levels, but this requires some level of experience. If you look at the Dividend Portfolio, this is why you see two target prices, one for regular buying and one for bulk buying.