A funny little thing called "DOLLAR COST AVERAGING" and another funnly little thing called the "RULE OF 72"

THIS POST IS AN ATTEMPT TO ANSWER THE AGE OLD QUESTION: "SHOULD I BUY?" Of course, we are talking about real estate. I was first introduced to a concept called Dollar Cost Averaging when I was just a wee lad learning whether to buy stocks. It was taught to me by a financial planner who also taught me the Rule of 72.

Let's first look at Dollar Cost Averaging. Dollar cost averaging refers to a financial principle that shows how to spread your earnings over time in an attempt to look at true earnings. It was taught to me using an analogy of a cow farmer, so that is how I will present it to you.

Let's say that you are a cow farmer. MMMMMmmmmmmmmmmm, steak. Wait, different post. Ok, back to cow farming. You get into the cow market when cows cost $100 each. You commit to spending $100 a month on cows. The first month, you buy 1 cow. WooooHoooo!

The second month, the cow market tanks. I mean people-jumping-out-of-hay-silos tanks. The price of cows is now at $50. You get a bit nervous, feeling that you lost $50 on your first cow. But, you are a person of integrity. Your word, even to yourself, is your word. You spend $100 and buy 2 cows. You now own a total of 3 cows. You have paid a grand total of $200 and your cows are worth $150. Your parents tell you to sell. (Photo courtesy of Geerts-Walaszek Family's photos)

The third month, all hell breaks loose. Cows are shooting each other. Foreigners are buying horse bonds and its keeping the cow market down. Cows are now worth only $25 each. The chicken farmers were bought by Google and everyone is eating chicken. After some serious soul-searching, you decide to go one more month. You spend $100 and buy 4 nearly worthless cows. You bought cows that you couldn't sell if you wanted to. Your friends all sold their cows, your family sold their cows, and they are all laughing at you. Ha ha.

The fourth month, something happens. The Chinese got scared and quit buying horse bonds. They started opening McDonalds in India where the religions all decided that beef was ok. The market is on its way up! $50 a cow! You buy 2 for $100.

The fifth month, you are finally back where you started. The government decided that Google shouldn't own chicken farms. That would make them a monopoly. (Bill Gates has been lobbying). You stuck it out in a market that saw you buy at the top of the market, saw your cows go down in value, and over time rebounded to even. You spend your $100 and buy 1 cow, because that is what they are now worth. But, how did you do over all? Let's see.

So, you spent a total of $500 and your cows are now worth $1000.00!!! Was it ever a bad time to buy? You decide. Keep in mind, no one knew what the cow market was going to do.

Ok, now that you are ready to run out and buy cows, let's shift gears. The rule of 72. It's just a nifty trick to help you figure your Rate of Return. Here is the formula:

72 divided by interest rate equals the number of years to double your money (if you let it ride).

Or, 72/%=years to double.

You can work it backwards:

72 divided by years to double equals interest rate.

Or, 72/years to double = %

Nifty, eh? I heard that Einstein thought this one up. So here is what you can now do. Buy some houses, track the appreciation, and in the tax savings and rents, compare from every angle using the rule of 72 and then.......you will want to buy more houses.