Day 15: How Small Investors Can Beat The Big Guys – Every Time

How Small Investors Can Beat The Big Guys - Every Time

It’s one of investing’s best-kept secrets, and it’s a terrible shame that it is so secret, because if it was more widely known, maybe more people would be more prepared to invest more money.

Maybe we’d already have a lot more millionaires than we do today. Maybe you would already be one of them!

The secret is this. Small investors can beat big investors every time, every year, by making small steady investments. It’s true. It’s a little-known investing tactic with the boring technical name of “dollar-cost averaging” while it should be called something more hyped like:

“The incredible invest small and WIN BIG secret strategy!’

(Maybe people wouldn’t believe that either, but they should, because it works)

This is how it works

You decide in December that you are going to invest $2,400 next year in a particular investment vehicle – perhaps a stock index that starts the year at $1 per unit. You plan to save $7 every day, and at the end of every month, take $200 of those dollars to buy units in the index.

At the same time, a big hedge fund investor thinks that’s a good idea, and he decides he will buy $2.4 million dollars of the index on January 1.

He feels cool because he can move that much money. You perhaps feel a little embarrassed buying just $200. Let’s see how we feel at the end of the year, shall we?

	J	F	M	A	M	J	J	A	S	O	N	D
Price	1	0.8	1	1.1	1	0.8	0.85	0.95	0.9	1.05	1	1.07
Units	200	250	200	182	200	250	235	210	222	190	200	187

While the hedge fund manager bought $2.4 million shares at the beginning of the year, and that’s what he had all year, and the value of that will have gone up 7% by the end of the year to $2,568,000 the small investor (that’s us!) will have bought a total of 2,526 shares, through the year, and those shares will now be worth $2,703.

If we had invested $2,400 at the beginning of the year, the value of our investments would have increased to $2,568, up 7%, but by buying each month, particularly buying more shares when the price was low and less when it was high, we now have $2,703, an increase of 12%.

We win, and the big hedge fund manager loses. Ok, so he still has $2.4 million than us, but this is how we catch up with him. We are making more money with our money than he is with his.