Why to Invest RegularlyJanuary 24, 2018
- Systematic investing moves money into your accounts consistently and automatically.
- Setting up a contribution schedule reduces the chances of making impulsive changes.
- This method can provide a greater opportunity to benefit from compounding over time.
Systematic investing is a powerful financial technique that can help you keep saving for retirement and other financial goals on track. It involves regularly—and automatically—contributing a set amount of money into a savings account, such as a 401(k), a Roth or Traditional individual retirement account (IRA), or taxable accounts.
Setting up a contribution schedule reduces the chances of making impulsive changes. “When you make the decision to set up a savings plan, you’re less likely to stop and start in the future,” says Judith Ward, CFP®, a senior financial planner with T. Rowe Price. “Effective long-term systematic investing is about staying steady, buying assets as prices rise and fall, and benefiting from compounding.”
Effective long-term systematic investing is about staying steady, buying assets as prices rise and fall, and benefiting from compounding.- Judith Ward, CFP®, Senior Financial Planner
THE BENEFITS OF SYSTEMATIC INVESTING
It helps control emotions. Systematic investing mitigates the influence that emotions may have on your financial plan. You contribute consistently every month regardless of global events and sudden shifts in asset prices—times when emotions can drive investment decisions. You will buy more shares when prices are lower, which can increase the growth potential of your portfolio, and fewer shares when prices are higher. This technique helps an investor avoid the temptation of trying to time the market. (See “How Dollar Cost Averaging Works.")
You pay yourself first. You set up your plan to deposit a certain amount, just as you might set up automatic bill pay. There’s no chance of forgetting to invest or inadvertently using the money for another purpose. “You know for certain you are saving for your financial goals,” says Ward.
You can benefit from the power of compounding. Systematic investing maximizes the potential for compounded returns, especially in tax-advantaged accounts, because you won’t miss making contributions. In a taxable account, you can choose to have interest and dividends automatically reinvested to buy additional fund shares.
By purchasing steadily during times of market price fluctuations, you buy more shares when the market is low and fewer when the market is high, potentially decreasing your average cost per share.
Dollar cost averaging cannot assure a profit or protect against loss in a declining market. Since such a plan involves continuous investment in securities regardless of fluctuating price levels, investors should consider their financial ability to continue purchases through periods of low and high price levels. This is a hypothetical example and is for illustrative purposes only.
HOW TO SET UP YOUR SAVINGS STRATEGY
Here are the steps to setting up a systematic investing plan:
1. Set a target.
Ask yourself how much you will need to reach your goal. For example, with retirement, consider aiming to save at least 15% of your gross salary each month (including any employer match) in tax-advantaged accounts, such as a workplace retirement plan or an IRA. You might decide to systematically invest in your IRA to save up to the annual contribution limit ($5,500 in both 2017 and 2018 or $6,500 for individuals age 50 or older).
2. Stick to your plan.
The simplest way to take advantage of systematic investing is through a plan that automatically and regularly transfers a preset amount of money from your bank account or paycheck to your investment account, such as your IRA, taxable brokerage account, or other savings account.
3. Set it—but don’t forget it.
When you set up your plan, establish an asset allocation—a mix of equity, fixed income, and cash—that will help you reach your goals. You may want to consider an investment that is already allocated for you, such as a target date fund that you select based on your time horizon and risk tolerance.
This material has been prepared by T. Rowe Price for general and educational purposes only. This material does not provide fiduciary recommendations concerning investments or investment management. T. Rowe Price, its affiliates, and its associates do not provide legal or tax advice. Any tax-related discussion contained in this material, including any attachments/links, is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding any tax penalties or (ii) promoting, marketing, or recommending to any other party any transaction or matter addressed herein. Please consult your independent legal counsel and/or professional tax advisor regarding any legal or tax issues raised in this material.
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