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Introducing DRIPs (DRIP Learning Center)

Introducing Direct Investment Plans (DRIPs)

Steve Jobs, founder of Apple Computers, advised people to "Think different." But those two words of wisdom also apply to investing.

There's the "old way" to invest and there’s the "way."

The "old way?" You buy a set number of shares through a broker, paying commissions (and probably buying with the crowd after prices have risen, then selling after prices started dropping).

Mutual funds are also an "old way." They're expensive (transfer agent fees, custodial fees, administration fees, registration fees, not to mention those funds that charge front-end or back-end loads). They underperform (of the more than 8,000 funds, fewer than one in 10 beats the S&P 500 in any 10-year period). And you've lost control because you've turned over responsibility for your financial life and future to some manager. You lose if he guesses wrong.

And what's the "different” way? DRIPs, or direct investment plans. Here's how they work and why they're an ideal way to build wealth.

How DRIP Investing Differs from Traditional Investing

Normally, when you invest in a stock, you buy a specific number of shares and pay a brokerage commission. When you sell, you pay taxes on your profits. (At a higher rate if you sell in less than a year.)

"Buying and selling" -- which is speculation, not investing -- is based on playing the stock market. You gamble that prices will rise, and you're continually buying and selling on that assumption.

DRIP investing is very different -- because it provides a way for you to build up holdings over an extended period of time. Of course, you can sell whenever you wish. But the beauty of DRIPs is that you eliminate the broker and buy your shares directly from the company. What’s more, since no broker is involved, you can employ risk-reducing strategies that are otherwise reserved for the very wealthy!

There are about 1,300 companies that allow you to invest directly (among them many of the finest companies in America). Plans vary by company, but they all make it easy to make multiple purchases to buy shares over a period of years at a variety of price points.

After you are enrolled in a company's DRIP, you make additional investments by sending back the tear-off portion of the statement you get after each investment and/or dividend reinvestment. In general, investments can range from as little as $25 to as much as $10,000 or even more. You can even request automatic debits from your checking account to fund your account at the DRIP.

Buying fractional shares...and "dollar-cost averaging"

Direct investment plans differ in another important way: You invest a cash amount (instead of buying a share amount). Therefore, you end up buying whole and fractional shares. Say you want to invest $150 regularly in Johnson & Johnson, and say JNJ is currently selling for $100. If your regular investment amount were $150, this time you’d have 1.5 shares credited to your account. If the stock price were to drop to $50 next month, you’d see that 3 shares were credited to your account.

Minimum Investment Amounts are Small

As a DRIP investor, it is easy to establish a well-diversified portfolio and continually build up holdings. With as little as $250 available for investing each month, you could build up holdings in 10 different companies by sending $25 to each company. Over the long-term, you can build up wealth in a very efficient manner.

Because you invest a fixed number of dollars on a regular basis--regardless of how many shares those dollars buy--you will buy more shares when the price of a stock is low and fewer shares when it is high. This strategy is called dollar-cost averaging.

Dollar-cost averaging makes a lot of sense because, after all, the logical time to invest is when stock prices are down. (And stocks are cyclical: Over a period of time, they go up...and down...and up...and so on.) But investing in a down market is not an easy thing to do--negative emotions are generally triggered by lower stock prices. Usually, you want to sell when prices go down!

Dollar-cost averaging helps overcome your natural tendency to panic when prices go down. As long as a company's prospects remain stable, its more logical to take advantage of dips in the market instead of falling victim to fear and allowing more logical investors to buy the stocks that you may be rushing to sell.

Those who follow dollar-cost averaging with a well-diversified portfolio tend to buy most shares when they are selling at bargain prices. Such a systematic approach to investing will reward the patient, long-term investor.

DRIP Investing Imposes Discipline and Helps Control Emotions

Many people get burned as investors. They buy at the top and sell at the bottom. That's because emotions play such a large part in investment decisions. And while it's human nature to try to "beat" the market, it rarely works. DRIP investing can help you win this battle of emotions. With wide diversification, when some of your stocks are lagging, others may be gaining. That way, you won't feel so much pressure to sell the laggards. You won’t be subject to the “all the eggs in one basket” syndrome.

With dollar-cost averaging, you can impose discipline on your investing. You decide in advance on the companies you want to own, how many dollars you intend to invest, and how often. Then you continue on this schedule, regardless of the market price of your shares at any one time.

Such strategies help you withstand the impulse to buy or sell with the crowd. (Always a bad idea.)

Remember, stock prices move up and down. Although the stock markets have historically returned about 10% annually, that average return includes many great years along with many negative ones.

Thus, patience is an important quality for investors--and dollar-cost averaging with wide diversification among companies and industries makes it easier to withstand the temptation to act impulsively.

To Become Enrolled in a DRIP

If you wish to become enrolled in a DRIP, you may contact Temper of the Times Investor Services, Inc. (TES), a FINRA/SIPC member. There are several other ways to become enrolled that are outlined in the link to How to Enroll. What’s more, TES enrollment order forms are available at this site in English and Spanish.

 

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