3 Popular Styles of Formula Investing

Formula investing is a method of investment that tries to eliminate guesswork. This method provides you with an easy to follow formula for your investments. There are many different styles of formula investing available. Here are some of the most popular types of formula investing.

1. Dollar Cost Averaging

One of the most popular forms of formula investing is dollar cost averaging. Dollar cost averaging has been around for many years and has been proven to be successful over the long term. This strategy is also very simple to implement for the average investor.

With dollar cost averaging, you will agree to invest a certain amount of money into a security on a fixed interval schedule. For example, you might decide to invest $500 into a particular mutual fund every month. With this strategy, you will be buying more shares in the mutual fund when the price is low. When the price is high, you will still be investing the same amount of money, but you will be getting fewer shares.

By using this method, you will essentially be able to eliminate the need to try to time the market. You will simply be accumulating as many shares of the mutual fund as possible. Over time, you will be able to produce a slow and steady upward growth curve with your investment. This strategy works very well with a no-load mutual fund because you can invest as frequently as you want without paying any commissions.

2. Value Averaging

Value averaging is another style of formula investing that many investors prefer. This strategy is similar to dollar cost averaging but has a few differences. With this type of investment strategy, you determine how much you want the value of your investment account to be at a particular interval. For example, you might say that you want your investment account to go up in value by $500 each month. The first month, you take $500 and invest it into a particular mutual fund. After a month, the value of the mutual fund has increased, and your account is now worth $600. Therefore, you would have to invest only $400 in order to increase the account by $500. Your new account balance would be $1000. The following month, the value of the mutual fund goes down, and your account balance is $900. You would then have to invest $600 to increase the account by $500 again. With this strategy, you are buying more shares when they are cheaper, just as with dollar cost averaging.

3. Target Date Investing

Another common investment strategy is using a target date investment strategy. This type of strategy shows you how to allocate your investments the closer you are to a particular target date. At the beginning of the term, you will usually invest in stocks. Then, as you get closer to the target date, you will reallocate your funds to safer forms of investment, such as bonds.