Systematic Investing is Long Haul Strategy
People are often afraid to invest in the stock market because they’re worried about buying at the wrong time and losing money. Some may also believe they don’t have enough money to start systematic investing, which is a smart way to make money over time.
It’s natural to be afraid of the unknown, but the U.S. stock market has historically yielded much higher returns than savings accounts, certificates of deposit, and other guaranteed accounts.
The good news is that you don’t need to be either rich or a Mensa genius to be a successful investor. You don’t need much money, either. You just need a smidge of discipline, some patience and realistic expectations plus an understanding of the basics of systematic investing.
If you have a 401(k) at your place of employment, you are already participating in systematic investing. Other than knowing that money comes out of your check each pay period to fund your retirement, you may not know much about how that works. This story will explain that. Those who want to strike out on their own by opening their own brokerage accounts and make their own investment decisions will also have a better understanding of how to accomplish this.
Principles of Systematic Investing
Systematic investing (also known as dollar cost averaging) takes the futility of trying to time the market out of the picture. By making regular monthly purchases of the same amount of money, you will buy more shares when prices are low and buy fewer shares when prices are high. You’ll also build wealth simply by saving money regularly.
A systematic investing strategy is simply investing — or you can call it contributing — a set amount regularly in the same investment to average out the cost. Let’s say you budget $100 a month to buy a fund that trades at $10 a share. That month you will buy 10 shares. If the share moves to $5 a share, you will get 20 shares for the same $100. Likewise, as the shares go up in price, you’ll buy fewer shares. You’ll worry less about the market while you build up your account because you’re either seeing your account go up in value or buying more stock with the same amount of money.
In the future, the account will be more affected by how the market does, than it is your regular monthly buys. But by then you’ll have a sizable nest egg.
Is Systematic Investing for You?
Systematic Investing is best suited for investors people who can put aside money indefinitely (as in for the benefit of children or grandchildren) or for at least 10 years. It’s especially appropriate for people in their 20s and 30s young investors starting to save for retirement. If that’s you, speak with a tax professional on how to set up your account.
You won’t become an instant millionaire with systematic investment but that’s not the goal. The goal is to earn a higher return than inflation over the very long term. When investing every month, you won’t need to worry as much when the market tumbles. Low stock prices help you. When prices go up, you are becoming wealthier.
As you build up your systematic investing account, you’ll start to get the benefits of compounding. That’s when your money will work for you, instead of needing to work hard for every dollar.
7 Ways to Stick with Your Investing Plan
The hard part will always be sticking with your investment strategy. Brokerage firms want quick traders. Financial news channels and websites always want something splashy to say. There are plenty of stories on the internet about people who get rich quickly, and the flip side is those stories that strike fear into the heart of potential investors.
Don’t buy into the hype. Don’t get excited or panicky if your portfolio zooms up or sags down suddenly. Markets will go up, and they will go down, but the chart below reminds us the S&P 500 Index has trended up over the long haul. Check out our 7 ways to stick to your investment strategy below.
1. Budget an Amount You Can Invest Every Month
Decide on an amount you can set aside every month without fail. It’s better to invest too little at first instead of needing to skip a month or, worse, needing to withdraw from the account. You can always increase the monthly amount as your income increases.
2. Find a Good, Diversified Fund with Low Expense
Choose a fund that invests in many different industries, so your performance won’t be too dependent on fads. Funds that mimic the S&P 500 Index are often inexpensive and easy to follow. When the S&P 500 Index is up, you’ll know your fund went up, and vice-versa. If you’re worried the stock market will be too volatile, you can invest in a fund that includes bonds. Those funds will likely be more stable but will likely return less than a pure stock fund.
You’ll also need to check to see whether the fund’s minimum investment suits your budget. Some funds have high minimum investments. You can avoid this by buying index funds that trade on the exchange, known as ETFs.
Open a brokerage account that will allow you to make automatic deposits and automatic purchases.
3. Find the Correct Brokerage Account
Several online brokerages offer low- or no-commission trading and automatic buys. Open an account with the minimum deposit required. Then set up a regular deposit from your checking account and enter a recurring order that automatically buys the same dollar amount.
Robinhood offers all these features and has low minimums. Take advantage of those account features and ignore the speculative advice that encourages you to trade more frequently than necessary. Stick to this strategy and reap the savings Robinhood and similar brokerages offer.
4. Set Up an Automatic Deposit
Depending on the brokerage firm and your bank, you may be able to set up an automatic withdrawal from your bank that goes directly into your brokerage account. If necessary, you can instruct your bank to automatically send money to your brokerage account as if you will be automatically paying a bill.
5. Set a Recurring Buy Order
In your brokerage account, set your recurring buy order to take place a few days after your automatic deposit hits to make sure the cash is available. That will prevent your monthly buy order from being rejected. If asked, the type of order should be “at the market,” which ensures you’ll get the order executed at the market price. Limit orders require the share price to be at or below some price you specify. If the share price is above that limit price, the trade won’t occur. That would defeat the whole point of the strategy.
6. Confirm All is Working Smoothly
Watch your brokerage account to make sure money from your bank is deposited on the right day and that your order executes. Do this every month.
7. Be Patient and Watch Your Wealth Grow
It’s not unusual for the U.S. markets to go up or down suddenly. It’s conceivable your account may be down for several years in a row. That should not deter you because you will be investing long enough to smooth out the effects of a long-term decline. As long as your funds go up more than down over the entire time you follow this plan, you’ll get the dual benefits of rising markets and disciplined saving.
Contributor Sam Levine is a Certified Financial Analyst and a Chartered Market Technician who has written on finance topics since 2003. He is an adjunct professor of finance at Wayne State University in Michigan.