In my last article I discussed two money management strategies that can be used by long term investors: Dollar Cost Averaging (DCA) and Dollar Value Averaging (DVA).

Both are useful strategies when you have a lump sum but don’t want to invest it all at once. DVA has the added benefit of working well in all types of markets whereas DCA works best in a declining market.

Today I’m going to introduce an additional money management technique I’m fairly certain most investors have never heard about.

It’s called TWINVEST and was created by Robert Lichello in the 1970s.

Here’s how it works.

As with DCA, you decide on how much to invest each period (the period could be weekly, bi-weekly, monthly or any other timeframe that suits you).

You then determine your TWINVEST code by multiplying your investment amount by 0.75 and then multiplying by the share price of your stock.

Once you have the TWINVEST code, you simply divide the current share price into the TWINVEST code and out pops the amount you need to use to purchase shares. The remainder is kept as a cash reserve.

Let’s look at an example. Suppose you decide you’ll invest $1,000 per month. Let’s also assume you decide to purchase a stock currently selling for $50 per share.

To calculate your TWINVEST code, multiply $1,000 (your monthly investment) by 0.75 by $50 (the current share price of your stock). In this case your TWINVEST code is $37,500 (that is, $1,000 x 0.75 x $50 = $37,500).

This won’t change for the duration of your TWINVEST activity, so you won’t have to perform this calculation again.

To start your investment, calculate how much you’ll need to invest in the stock using the following formula:

TWINVEST code / current share price = $ Invested in Stock

Plugging in the numbers from our example we get, $37,500 / $50 = $750.

Since you’re investing $1,000, you would purchase 15 shares at $50 (that’s your $750) and hold the remaining $250 in cash.

Now let’s fast forward a month and assume the stock price has fallen to $45. Again you plug in the numbers to get, $37,500 / $45 = $833.33. So you would purchase 18 shares (for $810, which is as close as you can get to $833.33 without purchasing fractional shares) and keep the remaining $190 in cash.

At this point, two months in, you’d be holding 33 shares and have $440 in cash.

At month three, let’s say your stock rebounds to $55. Plugging in the numbers give you, $37,500 / $55 = $681.81. This means you’ll purchase 12 shares at $55 and add $340 to your cash reserve.

I’m sure you can see the pattern. When prices fall relative to your initial purchase (back when you calculated the TWINVEST code), you purchase more shares (18 shares in month two) and hold less cash. When prices rise relative to your initial investment, such as in month three, you purchase fewer shares (12 shares in month three) and keep more cash on hand.

In essence you buy more when prices are relatively low and less when prices are relatively high.

You’d continue this process until you’re instructed to invest less than $25. At that point, your stock has tripled in value so you would reset your TWINVEST code and start again.

TWINVEST performs similarly to DCA but has lower risk, so your risk adjusted return should be higher. It’s an easy way to feed a fixed amount of money into the stock market over a period of time.

And, unlike DCA, it always keeps some cash on hand for later use. For me, I like the idea of DVA (if you have the cash flow flexibility) and TWINVEST. I think both strategies are superior to DCA. Unfortunately they are not nearly as well known.

So if you have a lump sum you’re thinking of investing, consider using a sound money management strategy to ease your way into the stock market and keep some cash on hand for WHEN, not IF, you need it in the future.

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