Monthly stock investment plan 2023
When it comes to a monthly stock investment plan, the question of how much should be invested per month to build wealth is often the golden question. Whether people like it or not, the short answer to this question is that it depends on a lot of things.
And while there is a lot of advice out there when it comes to how much you should set aside to invest monthly in stocks for the purpose of building wealth, one of the most often repeated (and with good reason) suggestions is to start investing as early as possible. Young people may be just beginning to spread their paychecks into rent payments, student loan debt, an emergency fund, and their social lives, but they also shouldn’t put investing last.
Monthly investment in long-term stocks
Brian Stivers, financial advisor and founder of Stivers Financial Services, was asked the correct way to calculate exactly how much money a 25-year-old investor would have to invest each month to become a millionaire.
Stevers explained that when it comes to investing, three components are very important: how much you contribute per month, the rate of return, and how long you have to save for.
When crunching the numbers, Stivers used three different rates of return and used a retirement age of 65, which would give 25-year-olds 40 years to reach the million-dollar goal. And this is what we found:
A young 25-year-old investor making investments that yield an annual return of 3% should invest $1,100 a month for 40 years to reach $1 million.
If instead he made investments that yield an annual return of 6%, he would have to invest $530 a month for 40 years to get to $1 million.
But if he chooses more aggressive investments that yield an annual return of 9%, he would only need to invest $240 per month for 40 years to reach the $1 million goal.
Monthly investment in stocks for 20 years
With a 20-year investment perspective, you are considered a long-term investor. You can put your money into the stock market directly or through mutual funds that contain shares. The value of your investment may fluctuate in the short term, but over a longer period of time, your average return will be higher than what other safer options can offer.
Your individual investment fund or stock may rise 11% in one year, or it may fall 6% the next year, then fall 9% and so forth. So it’s definitely a more difficult journey than safe and predictable options like a savings account or certificate of deposit. However, after 20 years, you are sure to see real returns in your account.
Security comes at a price, but risk comes at a premium. Since you don’t have to lose sleep over a stock market crash in a given year, you can reap the premium because the long run negates most of the risk.
Here are some $100 20-year monthly stock investment strategies that you can consider:
The average purchase price strategy
With the average cost-of-purchase strategy, the investor allocates a fixed amount at regular intervals regardless of other conditions. A classic example of this is a retirement account. Averaging the bid price is a strategy often used by long-term investors.
If you invest a certain amount each month, you are buying stocks in good times as well as in bad times. And in good times, the value of your shares increases. For example, suppose you start buying shares in a stock fund at $20 each and decide that you will invest $100 per month. This means that you will receive five shares for $100. After a year, the fund was doing well and the share price had risen to $25. Now you only get four shares for $100, but you’re glad anyway because the value of the the five shares is up from that first month last year, since 5 x $25 = $125. This means that she made a gain of $25.
In the second month, the shares were worth $21, so that month you got 4.77 shares, making a profit of $19, and so on. In good times, you get fewer shares, which reduces potential future upside, but it also means you have a nice overall gain on your investment.
Let’s say the share price drops from $20 to $15 in that first year. This would mean that you made a loss of 5 x $5 = $25 on your first month’s investment. In the second month you bought shares at $19 apiece, which means you got 5.26 shares. The loss from the second month will be 5.26 x $4 = $21, and so on.
While this loss is certainly stinging, you get shares at a discount to the initial purchase price and eventually get more shares for your $100 monthly investment. Since the share price is only $15, you can snap up 6.67 shares a month whenever the recession lasts. When things get a little brighter after six months, you will have bought 6 x 6.67 = 40 shares. Then, even with modest drops to $18 a share, you would now have made a profit of 40 x $3 = $120 from the transaction shares alone. Meanwhile,the loss will have shrunk from the first month to $10, and from the second month to just over $5.dollars and so on. This means that you will be ready to make a profit and get rid of a loss. When the share price returns to the original level of $20, you will then be able to get rid of the initial loss while the bargain gain for the six months shares will grow to 6 x $5 = $200.
If you stay calm and stick to the plan even when the market goes down and keep investing monthly in stocks, you will get more stocks for your money. These additional shares boost your investment returns when the market picks up again. This is a big part of the reason why common stock investors can get a higher long-term return compared to other safer investments despite the temporary ups and downs of the market.
Investing in dividend stocks
Many stocks and funds also pay dividends to investors. Dividends are basically dividends given to the owners (shareholders), and they provide an extra 2 percent return on top of the normal share price increases. Most mutual funds and stocks offer the option to reinvest dividends automatically. This is done in good times as well as in bad times, which means that with a dollar cost averaging strategy, these distributions will be an invisible boost to your regular investment schedule.
Note: Asset earnings are reinvested to earn more profits; Where profits are usually made because the investment generates profits from the original allocated dollar amount and the accumulated earnings from previous periods.
Let’s say you decide to invest in a mutual fund with an average annual return of 7%, including dividends. For the sake of simplicity, let’s assume that the distribution takes place once a year. After 20 years, you will have paid 20 x 12 x $100 = $24,000 in the fund. However, the compound return will more than double your investment. The easy way to calculate the numbers is to use a calculator, but you can do the calculation manually by adding the new year’s contribution to the old total and then multiplying the new total by 1.07 for each year.
First year: $1,200 x 1.07 = $1,284.
Year 2: ($1,284 + $1,200) x 1.07 = $2,658.
Year 3: ($2,658 + $1,200) x 1.07 = $4,128.
Note: As the amount being invested increases over time, your range of investment options expands, allowing you to have a more diversified portfolio.
What you must remember
In fact, your annual statement will not be as tidy as any calculator can predict. For starters, the math is usually oversimplified to not take into account any of the fees and taxes you have to pay. There’s also some wiggle room in how you calculate the averages that go into the equation. However, history shows consistently higher returns for a regular investment in stocks or equity funds compared to other types of investments, making it the perfect choice for the long-term investor.
A small amount like $100 leaves few options besides mutual funds or ETFs, at least in the beginning. Many brokers charge you a transaction fee when you buy stocks. Unless you are investing in risky stocks, this means that you will not be able to diversify your portfolio. By contrast, mutual funds are pre-made portfolios of many different stocks with a clearly defined risk profile and internal diversification.
However, a mutual fund does charge an annual fee that can grow to a fairly large size as your capital grows. If you are comfortable taking a more active role in choosing your investments, it may make sense to withdraw the money from the fund after a few years and build your own diversified portfolio with the trusted brokerage firm of your choice.
Quick summaries:
The long-term investor has a time horizon of at least 20 years; This time frame enables them to avoid playing it safe and instead take calculated risks that can ultimately pay off in the long run.
Dollar cost averaging is a smart strategy for long-term investors because it involves setting a set amount to invest per month on a regular basis, often monthly, regardless of market performance or the strength of the economy.
Buying stocks and funds that provide dividends is another good tactic for the long-term investor, as is the case for reinvesting those dividends automatically.
Compounding is a huge advantage for the long-term investor, with asset dividends being reinvested to earn greater profits over time.
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