There are many recurring questions discussed on the Drip Investing boards. What companies should be selected? How many companies should be selected? Should I accept fees? How much should I send each month?
Each one of these questions deserves an article, and I will address my solution for the latter.
The decision of how much to send each month should be rooted to the assumption that regular purchases will be made over a long period of time. Dollar-cost averaging gives us great strength in risk reduction.
Most people choose to send the same amount to their selected companies every month. This simple solution is effective because it not only lends itself to the automatic investment options many companies offer, but it also takes the guesswork out of the equation.
When I considered this option, I understood the strength in purchasing a larger number of shares when the price was down. After all, the companies are selected with a time frame of ten or more years in mind, and we fully expect them to rebound from short-term problems.
This is why I noted with interest another option, INVEST%®. MoneyPaper (http://www.MoneyPaper.com) introduced this concept, and it is based upon the idea of increasing the amount sent to struggling stocks, decreasing it for stocks doing well.
The determination is made by comparing the current price to the company's 52-week high and low. If the company is currently at its 52-week high, 50% of the normal amount is sent. If it is experiencing its 52-week low, 150% is sent. A formula for figuring out the amount to send is ((1 - ((Current Price - 52WeekLow) / ( 52WeekHigh - 52WeekLow))) + 0.5).
However, I ran into a problem using this methodology. Many of my companies were doing well, which meant that I was no longer sending as much as I had been setting aside for my DRiPs, and was accumulating cash. I wanted my money to be working for me, not sitting in a checking account.
I decided that I would continue to use the values that were calculated through the INVEST%® formula, but each calculated value would be used to decide how much I would send to each company relative to the other companies.
For instance, if the INVEST%® calculations indicated sending 100% of the expected amount to Company A, 75% to Company B, and 50% to Company C, then I would send the total planned amount to the companies, Company A receiving a third more than Company B, and twice as much Company C.
I didn't want to perform these calculations every month, so I put them in my Excel 97 DRiP Spreadsheet and offered it to everyone. When I realized that some were not able to use this spreadsheet, I wrote the Web-based InvestMete program.
But does the system work? It sounds reasonable, but do the numbers support it?
To do some backtesting, I selected two of my DRiPs: Enron (NYSE: ENE), which has been on a tear over the past 18 months, Coca-Cola (NYSE: KO), which has been having its share of problems, and Pfizer (NYSE: PFE), which has been up and down. I then ran the numbers as if I had decided to send $50 to each of these three companies every month. I started at the beginning of 1998 and made 18 imaginary purchases with each scheme, a flat $50 per month with INVEST%® and InvestMete. A total of $2,700 was set aside to make the purchases.
After a year and a half, the $50 purchase category yielded a current value of $3,013.39. The INVEST%® scheme worked against it in that $691.70 ended up in cash. This amount, added to the current value, resulted in a total of $3,002.89. The InvestMete formula beat the other two with a current value of $3,118.76.
It would be interesting to see more in-depth backtesting, but I will leave that for someone else. InvestMete is simply another alternative for determining how much to send to participate in the most effective long-term investment strategy available -- DRiPs.
INVEST% is a Registered Trademark of The Moneypaper Publications LLC