“Make investing a habit.”
It’s advice you might’ve heard before ... and for good reason. Investing consistently, a bit out of every paycheck, is powerful. There’s the plain and simple fact that you’re building up your wealth, deposit by deposit. And if you put it on autopilot, there’s the whole “out of sight, out of mind” thing.
But that’s not all. There’s another reason why the practice of consistent investing has historically been good for investors. And it’s so compelling that it even has a name:
Dollar-cost averaging
Boring term. But a BFD for your bottom line.
Dollar-cost averaging is investing a consistent dollar amount at regular intervals of time, no matter what’s going on in the market. Example: a $100 recurring deposit into your investment account every month.
Why does it matter?
Investors want returns. And some investors, in an attempt to earn as much in returns as possible, make a grave mistake: attempting to “time the market.” They think they can guess what will happen next, and try to “buy low” and “sell high.”
Bad idea. No one — no one — knows what the markets will do tomorrow. Not us. Not that confident-sounding guy on TV. Not even the people who are paid to do it.
That means you’re inevitably going to feel it on days when the market goes down. Bummer, yes, but it’s not all dark and gloomy. Here’s why: When the market’s down, that $100 deposit will get you more shares of stock. (That’s why you might hear people say that the markets are “on sale.”)
Let’s look at an example
Say the market was humming along, then plummeted, and then started to come back up.
Here’s what would happen if you were to keep investing consistently the whole time:
And here’s what would happen if you were to keep your money in a bank account while the market was down and then invest what you’d saved once it started to come back up:
In the first example, while your investments did lose value temporarily, it worked out pretty well for you after the market rebounded. In the second example, you missed out.
Back to real life. By using dollar-cost averaging, you take your own emotions (aka an investor’s worst enemy) out of the equation. You get rid of the risky guesswork, make investing a solid habit, and give yourself the opportunity to grow your net worth steadily over time. Pretty compelling reasons to invest regularly, right?
Here’s a compelling reason why “regularly” should start … right now.
© 2019 Ellevest, Inc. All Rights Reserved.
Information was obtained from third party sources, which we believe to be reliable but not guaranteed for accuracy or completeness.
The practice of investing a fixed dollar amount on a regular basis does not ensure a profit and does not protect against loss in declining markets. It involves continuous investing regardless of fluctuating price levels. Investors should consider their ability to continue investing through periods of fluctuating market conditions.
The information provided should not be relied upon as investment advice or recommendations, does not constitute a solicitation to buy or sell securities and should not be considered specific legal, investment or tax advice.
The information provided does not take into account the specific objectives, financial situation or particular needs of any specific person.
Diversification does not ensure a profit or protect against a loss in a declining market. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income.
Investing entails risk including the possible loss of principal and there is no assurance that the investment will provide positive performance over any period of time.
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Dr. Sylvia Kwan
Dr. Sylvia Kwan is the Chief Investment Officer of Ellevest. Dr. Kwan is a CFA® charterholder with more than 30 years of industry experience. Before Ellevest, she founded SimplySmart Asset Management and held senior portfolio management positions at Financial Engines and Charles Schwab. She is also an enthusiastic triathlete and serves on the board of Exit 182, the investment committee that oversees the endowment of Grinnell College.