Systematic investing can smooth ‘Bumps in the road’
Published 2:04 pm Friday, April 16, 2010
In the investment world, there aren’t many certainties, but here’s one of them: prices will always go up and down.
As an individual investor, you can’t do anything about this volatility. But the way you respond to it could make a big difference in your long-term investment success.
Many investors think they can “beat” volatility by trying to time the market in other words, by buying when prices are low and selling when prices are high. In theory, this is an excellent strategy, but in reality, it’s pretty much impossible to follow because no one can really predict, with any accuracy, market highs and lows.
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So instead of attempting to time the market, you’re much better off by following a time-tested strategy known as systematic investing.
To systematically invest, you simply put the same amount of money into the same investments at regular intervals. To illustrate, you could put $100, $500, $1,000 or more into Investment X on the first of every month. To make it even easier on yourself, you could automatically transfer those dollars from your bank account directly into the investment you’ve chosen.
In all likelihood, your contribution will buy a different amount of shares of Investment X each month. For example, if Investment X sells for $100 per share in January, a $500 investment will buy five shares. In February, if the price has fallen to $50 per share, your $500 will buy 10 shares.
In other words, when you systematically invest, you’ll automatically buy more shares when the price is low and fewer shares when the price is higher—and that’s a great way to cope with market volatility. But systematic investing also offers some other advantages, including the following:
Efficient share building—The more shares you own of an investment, the bigger your cumulative gains whenever the price of that investment rises. Consequently, increasing your shares should be a prime objective—and systematic investing is one way of building your share ownership.
Investment discipline—Most people realize the value of investing for their retirement and other long-term goals, but they often put it off each month and find other things to do with the money—and by then, there’s often nothing left to invest. But by setting up a bank authorization to invest systematically each month, you’ll “pay yourself first.”
Lower cost of investing—Through systematic investing, your cost per share likely will be lower than if you made sporadic lump sum investments. And by lowering the cost of investing, you will, in effect have the potential to boost your returns.
While systematic investing is typically a good way to fight the effects of volatility, it can’t guarantee a profit or prevent a loss in declining markets. And keep in mind that you need to have the financial wherewithal to keep investing through up and down markets.
But if you have that ability, consider putting systematic investing to work for you. It may not be glitzy or glamorous, but it may work for you.