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.
INVEST% is a Registered Trademark of The Moneypaper Publications LLC