Formula Investing: Removing the Human Factor Has Advantages

Many investors utilize formula investing in order to make the process easier. Formulate investing can be very beneficial but it has a few drawbacks as well. Here are the basics of formula investing and what it can do for you as an investor.

Formula Investing

Formulate investing is a method that utilizes a specific plan in order to determine your investing decisions. It can govern everything that has to do with an investment portfolio. It could tell you when to purchase securities and what mix of investments you need. It can also help you determine how much money that you need to invest. There are many different formulas investors use regularly. Some are more successful than others.

Avoid Emotion

One of the biggest problems with most investors is that they cannot control their emotions. They will base their investment decisions on emotions and the decisions are usually wrong. For example, many investors will liquidate their positions after a big loss. However, when the price of a stock is down, this is the best time to buy. Professional investors understand this because their emotions are not entangled in the decision making process. Without taking the time to become a professional investor, you can use formula investing and overcome this. With formula investing, you can remove all emotion from the trading decisions that you make. You will simply stick to the plan. regardless of market conditions.

Simplicity

Formula investing is also very simple and convenient for investors to use. Any investor should be able to follow the basic directions that come with an investing formula. When you do not have to spend a great deal of time analyzing securities and the market, the process becomes much easier. Therefore, many investors prefer formula investing because of the simplicity that it provides.

Ignores the Market

One of the benefits of this strategy could also be considered a downfall. With formula investing, the strategy will completely disregard what is going on the market. The strategy is developed and then is used to apply to any market condition. Therefore, it fails to adapt to changes in the market. If you do not have the proper resources, this can empty your account.

Example

One of the most common forms of formula investing is dollar cost averaging. This strategy has been proven to work over the long-term. With dollar cost averaging, you will invest a certain amount of money, into a security, on a regular basis. For example, you might decide to invest $100 per month into a particular mutual fund. You will continue to invest $100 regardless of what is taking place in the market. Therefore, whenever the price of the mutual fund shares are low, you will be purchasing more shares. Whenever the price is high, you will be purchasing fewer shares. This strategy helps eliminate the need for timing the market and helps you accumulate shares in the mutual fund. Over time, you will be able to build up a substantial portfolio.

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