Constant Dollar Accounting

Finance a la shmoop what is the constant dollar plan? well trying to game the [Two men playing monopoly]

market wait until that perfect day when it bottoms then you'll get invested yeah

well maybe if you were an MBA PhD and had ten years training at the best hedge

funds and had a natural knack for market timing and really new financial history [Resume appears]

well maybe then it might make sense for you to roll the dice even though knowing

that all of your brethren with the same background are wrong about half the time

but you're a plumber or a surgeon yeah not that much of a difference or a [Surgeon holding a heart]

lawyer or a professional wrestler so what on earth are you doing trying to be

smarter than the smartest professionals on Wall Street who are actually educated and

supposed to know how to do this stuff and even they're wrong a huge percentage

of the time right so you want to be invested in the stock markets all right

that's a smart move hard to argue and the US stock market has generally gone

up a whole lot over time you know about 10% a year with dividends reinvested [US stock market chart]

roughly so rather than trying to be clever about things and maybe sit in a

whole bunch of cash while the bull market takes off and you're just staring

at it not making money well why not take away the decision process and deploy

what's called a constant dollar plan well you want shares of given index fund

and call it ticker spwhy which represents the sp500 and is super cheap

on fees yeah like that super cheap like 18 cents for every hundred bucks that

you invest the management fees per year way cheap so you want to invest your [Man approaches piggy bank]

easy savings of five hundred bucks a month

well you just discipline yourself to oh i dunno, on the 15th of each month you invest

that 500 bucks regardless of the price of the index fund last month its NAV or

net asset value was 13 dollars and 38 cents a share and your $500 bought you a

500 / 13.3 yeah about 37 shares of it all right well this month dropped it's

now only 12.75 so your $500 buys you a few more shares that's 500 divided [Last month and this months stock values]

12.75 yeah got it next month well it might be $13 and 87 cents a share and

yep your $500 will then buy you fewer shares but do you really care can you do

anything about these differentials no should you hold your money in cash in a

B of A account getting 1% of your interest waiting for the NAV of the fund

to magically one day dip down to 12 dollars and 56 cents a share

hoping to then at that moment put all of your dough to work well what if the fun

never gets there and given that over time the market goes up when your not [Arrow points to stock value rising]

invested in it you're basically betting against it history or data in making

such a big bet there yeah how does that make sense so a constant dollar plan

takes away that risk kind of the the risk of missing the bull market the

market goes up about six out of every seven years so it's a bad bet to sit out

usually well that's a bad thing right so get invested and think of a constant

dollar plan as the religion of magic piggy banks that as long as you follow [Piggy bank levitating in a church]

the code of the Jedi and put that 500 bucks away every month regardless of

price you will wake up one day in great wealth and feeling the force of taxes

I'm sorry you knew we were going to go there [Man discussing taxes]