To achieve investment success, you don’t have to start out with a huge sum or “get lucky” by picking “hot” stocks. In fact, very few people actually travel those two routes. But in working toward your investment goals, you need to be persistent — and one of the best ways to demonstrate that persistence is to invest automatically.
How do you become an “automatic” investor? You simply need to have your bank automatically move money each month from a checking or savings account into the investments of your choice. When you’re first starting out in the working world, you may not be able to afford much, but any amount — even if it’s just $50 or $100 a month — will be valuable. Then, as your career progresses and your income rises, you can gradually increase your monthly contributions.
By becoming an automatic investor, you can gain some key benefits, including these:
• Discipline — Many people think about investing but decide to wait until they have “a little extra cash.” Before they realize it, they’ve used the money for other purposes. When you invest automatically, you’re essentially taking a spending decision “out of your hands.” And as you see your accounts grow over time, your investment discipline will be self-reinforcing.
• Long-term focus — There’s never any shortage of events — political crises, economic downturns, natural disasters — that cause investors to take a “timeout” from investing. Yet if you head to the investment sidelines, even for a short while, you might miss out on some good opportunities. By investing automatically each month, you’ll maintain a long-term focus.
• Potential for reduced investment costs — If you invest the same amount of money each month into the same investments, you’ll automatically be a “smart shopper.” When prices drop, your monthly investment will buy more shares, and when prices rise, you’ll buy fewer shares — just as you’d probably buy less of anything when prices are high. Over time, this type of systematic investment typically results in lower costs per share.
Furthermore, when you invest systematically, you’re less likely to constantly buy and sell investments in an effort to boost your returns. This type of frequent trading is often ineffective — and it can raise your overall investment costs with potential fees, commissions and taxes. (Keep in mind, though, that systematic investing does not guarantee a profit or protect against loss. Also, you’ll need the financial resources available to keep investing through up and down markets.)
Clearly, automatic investing offers some major advantages to you as you seek to build wealth. Of course, if you’re contributing to a 401(k) or other employer-sponsored retirement plan, you’re already automatically investing because money is taken out of your paycheck at regular intervals to go toward the investments you’ve chosen in your plan. But by employing automatic investing techniques to other vehicles, such as an Individual Retirement Account (IRA), you can continue your progress toward your long-term goals, including retirement.
This article was written by Edward Jones for use by Laura Evans, Edward Jones financial advisor of Richmond Hill.