DRIP Investing Versus
Lump Sum Investing.

Drip Investing refers to building equity in the stock of a company via a Dividend Reinvestment Plan.

Under this arrangement an investor doesn't receive quarterly dividends but instead has them automatically reinvested back into the company. Optional, regular cash payments (often small amounts) can also be added to further increase the shareholding, often with no/low commissions or fees involved and sometimes at a discount to the market price.

DRIPs were designed to encourage long term investment without the worry and volatility associated with active trading of stocks, as well as to help stabilize a stock's price.

Setting Up A DRIP.

Many investors like DRIPs because often they can be set up to avoid stock broker's commissions.

Approximately 1,300 companies (around 20%) offer Drips, including many blue chip companies like 3M, Bank of America, ExxonMobil, Johnson & Johnson, Coca-Cola, etc.

Many DRIPs are only available to existing shareholders so an investor may need to purchase at least one share through a broker before being allowed to set up a drip investing entity directly with a company.

Lists of companies offering DRIPs (and their websites), DRIP Investing Newsletters and advisors, can all be found by Googling "drip investing".

The Pros And Cons Of DRIPs.

The Pros:

  • Many companies charge "No Fee" to shareholders for their reinvestment plans,

  • Many DRIPs allow for the optional cash purchase of further shares at no commission,

  • DRIPs encourage regular saving and harness the power of compounding,

  • DRIPs allow dividend reinvestment (plus the option of adding further small cash deposits) into partial shares... you don't have to find enough cash to buy "whole" shares,

  • Added shares can often be purchased at a discount to market price,

  • DRIPs are ideal for conservative investors who wish to avoid the stress and worry of volatile markets,

  • ... and are a perfect vehicle for "compulsory saving" for a child's future education, a wedding, etc,

safe investing stocks rising
DRIPs can help conservative investors weather the ups and downs of volatile markets.

The Cons.

safe investing stocks falling
...unless it's a severe Bear Market. Then DRIPs, Dollar Cost Averagers, and anyone still in the market gets hammered!

  • Many small purchases of stock can create a nightmare of paper work and record keeping to ensure that all tax liabilities on all dividends are met, and proper Capital Gains Tax calculations are available when needed,

  • This is especially so if Drips are set up for many different companies (Diversification across various sectors being a cornerstone of prudent investing),

  • DRIPs often can't be cashed out quickly in case of emergency,

  • Some DRIPs have high initial set up fees,

Dollar Cost Averaging.

Dollar Cost Averaging (also called a Constant Dollar Plan) is recommended by many financial advisors as a way of balancing return and risk.

They believe an investor should invest equal amounts of money into stocks regularly over a longer period (e.g. $100 each and every month) rather than invest it all in one lump sum or attempt "timing the market".

This strategy seeks to minimize risk in volatile markets by ensuring more shares are bought when share prices are lower and less when markets are higher. The aim is to lower the overall cost of shares over time.

Critics of this strategy claim rather than reducing exposure to risk DCA may make investors complacent.

Rather than doing their due diligence investors may simply ignore the risks involved and be tempted to place more of their life's savings at risk by investing without regard to the market's direction.

The fact remains... there will always be risk in the market.

After the Great Crash of 1929 investors who'd bought at the peak had to wait 25 years before share prices recovered.

In such a severe, prolongued Bear Market many investors were on a one way street to heavy losses no matter what "risk mitigating strategy" they used.

And many back then didn't remain solvent long enough to bounce back.

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