The Finatical

Week of March 8th, 2022 - Dollar-Cost Averaging, Unemployment Stimulus Packages, Venture Capital's Role in Startups

Finatic

Aditya Bagga

Ksheeraj Sanga

, and 2 others

Mar 08, 2022

If you are interested in personal finance and investing, you may have previously heard of a term called dollar-cost averaging. This is one of the most efficient ways to gain wealth over an extended period of time. Today, we will be learning what dollar-cost averaging is, why we use it, and analyzing a great example of it.

Volatility—An Underlying Reason for Dollar-Cost Averaging

To understand what dollar-cost averaging really is, it’s important to first learn about volatility. This is the idea that stocks, or other types of investments, can unpredictably and rapidly go up and down in value over a short period of time. To avoid losing money to volatility, you should continue investing over a long period of time without selling, as the S&P 500 index for example, has always gone up eventually even though it can take a very long time to happen, especially when adjusting for high inflation like we see today. This is where dollar-cost averaging comes in: it is a way of spreading out money invested over time, bi-weekly for example, which helps to counteract volatility.

Why Dollar-Cost Averaging?

Now we will uncover why dollar-cost averaging is used so frequently among investors. A big reason that DCA (Dollar-Cost Averaging) is used, is to take emotions out of investing. This is important because when a stock’s value goes down, you might want to sell it. If you refrain from doing this and instead invest more money, you will profit when this stock ultimately rises in value once again. Another reason this method is used, is to continue passively investing for a long period of time. A well-known and historically true saying is that “time in the market beats timing the market!” With dollar-cost averaging through modern brokerage services, you can set up a system where a certain amount of money is automatically invested for you, at certain intervals of time. Eventually, you will likely be more wealthy using this system than if you just continuously bought or sold your investments whenever you wanted.

Putting Dollar-Cost Averaging Into Action

Finally, we will look at a great example of DCA in order to further understand how we can use it ourselves for more financial gain. Instead of the automatic periodical deposit idea, we can still use DCA to personally choose when to invest. Let's say that you have $1000 to invest (this system will work with any amount of money). Instead of investing it all at once when you find a supposedly good time in the market, hoping that your investment won’t crash, you could just invest over 5 months. If you are planning on buying a stock that is priced at $25, you could purchase 4 shares in January and invest $100. If the stock price increases in February to $50 dollars per share, you would only purchase $2 shares that month for the same total of $100. In March, say one share drops to $10; you would then purchase 10 shares. You can continue to do this every month until your $1000 is all invested, and you would likely have a higher overall gain than if you had invested at once. You would probably also own more shares of the stock.

Financial Trends

Effects of Stimulus Packages on Unemployment

Insurance programs for unemployment that exist in each state that provide monetary support for workers that have recently become unemployed and for those seeking work. Each state in the U.S. has different eligibility requirements for providing different levels of benefits, and provides 34 to 54% of a worker’s previous income. The majority of the states in the U.S. provide this benefit to the unemployed for roughly 26 weeks. Due to the crisis caused by COVID-19, the federal government has promised to increase the duration of these benefits by an additional 13 weeks. However, in order for Congress to provide the unemployed with their additional benefits, they delivered $1 billion in grant aid to state agencies that runned unemployment insurance programs for extending unemployment benefits.

Typically for an individual to receive unemployment benefits, they need to be actively seeking work, but in this case the federal government had to waive this requirement for seeking work during the COVID-19 crisis, as their number one priority was to provide economic relief to those that were unemployed. The third phase of Congress’s plan was to increase the weekly benefit for the unemployed to $600 per week. Congress stated that these extra financial benefits would go to anyone who is receiving state or federal employment benefits, however this decision made by Congress would come back to bite them as the U.S. would face a big crisis with inflation.

Venture Capitalism's Role in Building Startups

Venture capitalists are people or companies that invest in business ventures, where they provide working capital for startups or their expansion. The majority of venture capital comes from professionally managed firms, where they seek higher rates of return than they could earn through other investments, like investing in stocks or bonds. These firms obtain their investment capital through pension funds, insurance companies, and wealthy investors. A team of financial analysts at each firm makes the decisions about which business the firm should invest in, and as a result they receive management fees (essentially a percentage of the profits) as compensation for their work. These firms also tend to vary in sizes, some large and some small but they all have one thing in common and that is commanding massive capital power.

This is what separates venture capitalist from other investing groups like private and angel investors, as they are more willing to take risks on startups and industries that are starting to develop. Their motto in investing is to go big or go home, the higher the risk, the bigger the award. They don’t look for stable and safe companies, hence they invest in startups that have high potential for growth and the most common sector in which venture capitalists invest in for startups consist of IT, bio-pharmaceuticals, and clean technology. Facebook, Groupon, Spotfy, and Dropbox are all examples of start up companies that received venture capital funding to reach to the point that they are in right now.

Financial Guidance

"In investing, what is comfortable is rarely profitable." - Robert Arnott

It’s a human tendency to stick to the familiar and safe options. While this doesn’t mean you should make reckless decisions, sometimes you have to take a risk to reap the rewards.

Money Fact

Money is not made of paper!

Many of us grew up assuming that money was made of paper. However, money is actually made of cloth, specifically 75% cotton and 25% linen, according to the Bureau of Engraving and Printing.