Photo on Unsplash by Nathan Dumlao
A quick to-go cup of coffee costs about five dollars, give or take. But does this simple luxury somehow cost you in the long run?
Well, a YouTuber called Bob Sharpe made a habit out of investing five dollars a day into a simple index fund less than five years ago. Today, his portfolio is valued at around $12,600, with a +$4,100, or about 48% overall return on his investment.
This strategy relies on a concept known as Dollar Cost Averaging, where smaller portions of money are invested in set intervals. The reason why this is so useful is that index funds generally trend upwards, but crashes and recessions still occur.
By investing every day, you are mitigating your risk; you buy both when the stock market is down and when it goes up. A hypothetical puts this strategy’s best use case in context; if you invest all of your money into the stock market at once, and there is a market crash, your portfolio only feels the downside.
With Dollar Cost Averaging, you would be buying shares for lower prices during a crash and getting the same amount of shares for a lower price than if you had invested before the dip in prices. It would likely act to give you more confidence in investing as well, since you don’t have to worry as much about these sudden crashes.
Buying at regular intervals makes the strategy easy for beginner investors. In doing so, it also sets up good habits by setting aside money automatically and disincentivising people from timing the market. As the adage goes, “Time in the market beats timing the market”.
Sharpe’s results don’t even consider how letting such an experiment run for longer would allow the effects of compounding to make his investment grow exponentially. In a few decades, that number could very possibly be in the hundreds of thousands. By setting aside that small sum of money daily, he has proven that skipping a coffee may be for the best.
But is it for the best, though? Opportunity cost, which relies on the fact that choosing one choice may lead to the loss of the benefits of another, explains this well: the joy of having that coffee means not contributing that same money to your investment account, where it can compound and set you up well later.
Yet, that coffee is something tangible you can enjoy in the moment. You don’t have to wait 20 years for it; you can just take a sip as soon as it’s ready.
Perhaps it’s part of your morning routine. Perhaps you don’t have the time to make coffee in the morning. Perhaps the coffee shop nearby makes it just how you want it.
There’s no reason to judge a hard-working individual for splurging on a simple cup of coffee in the morning. Sure, it will probably impact their life positively if they cut it off and invest the money. But money is meant to be used and not just gawked at in an investment account balance.
Be First to Comment