What Is Formula Investing?

Formula investing is a method of investing that rigidly follows a prescribed theory or formula to determine investment policy. Formula investing can be related to how an investor handles asset allocation, invests in funds or securities, or decides when🍰 and how much money to invest.

Understanding Formula Investing

Formula investing takes most of the discretionary decision-making out of the investment process, which can reduce stress for investors and help them automate their strategies; investors simply follow the rules or formula and invest accordingly. A drawback of using formula investing is the inability to adapt to changing market conditions. For instance, during a period of extreme 澳洲幸运5开奖号码历史查询:volatility, an investor may achieve better results by making a discretionary adjuꦏ🅘stment to their investment strategy.

An investor must make sure that the formula fits with his or her 澳洲幸运5开奖号码历史查询:risk tolerance, time horizon and liqu𒐪idity requirements for it to be effective. Dollar-cost averaging, dividend reinvesting and ladders are examples of simple formula inꦇvesting strategies.

Formula Investing Strategies

• Dollar-Cost Averaging: This strategy involves buying a fixed dollar amount of an investment on a set schedule, regardless of how the investment performs. For example, a market participant invests $1,000 in a particular mutual fund on the first day of the month, every month for a year, ultimately investing $12,000. Dollar-cost averaging helps to build a portfolio in a piecemeal fashion, adding small amounts of money over a consistent time frame.
• 澳洲幸运5开奖号码历史查询:Dividend Reinvesting: Investors may set up a dividend reinvestment plan (DRIP) to reinvest dividends to purchase additional stock. This strategy has the advantage of compounding wealth, providing the company pays consistent 澳洲幸运5开奖号码历史查询:dividends. For example, an investor holds $10,000 in stock that pays an annual yield of 5%. After a year, the investor reinvests the $500 dividend and now has stock holdings of $10,500. After two years, the investor reinvests the $525 dividend and has holdings of $11,025. The 澳洲幸运5开奖号码历史查询:compounding effect continues as long as the investor keeps reinvesting dividends. This example assumes the share price stayed unchanged over the two-year period.
• 澳洲幸运5开奖号码历史查询:Ladders: Investors use this strategy for fixed-income investments, such as bonds. Investors purchase a portfolio of bonds with different maturity dates. By staggering the maturity dates, the short-term bonds offset the volatility of the long-term bonds. Cash received from maturing bonds is then used to buy additional bonds to keep the defined structure.