The benefits of regular investing
There are many different approaches to investing. Some people enjoy the excitement of finding the next stock that will take off or the thrill of crypto. Others prefer security and are prepared to earn lower returns knowing their money is safe.
Regular investing isn't exciting, but it's a very effective way to grow your wealth. It also helps overcome one of the main challenges of investing: deciding when to start for fear of it being the wrong time. Regular investing overcomes this. That's because, by not investing all your money at once, it can be beneficial if it's the so-called wrong time to invest.
What is regular investing?
There's nothing clever about regular investing. It's simply as the name suggests. You invest on a regular basis, usually a consistent monthly amount, via a direct transfer from your bank account. It's more about having a plan and being disciplined.
Once you start, you usually don't need to make any more decisions. Instead, you just let your plan run. This removes fears that may arise when you read dramatic headlines or concerns arise about the financial markets. Rather than getting caught up in the emotion, you can relax knowing you're only investing a small amount each month. On top of that, if the markets fall, you'll start buying at a lower price.
Here's an example of how a regular investment plan can work. In this simple scenario, $5,000 is invested upfront, followed by an additional $250 each month. The assumed investment return is 7%, which is reasonable over the long term.
As you can see from the graph, both the balance and growth build slowly and gain momentum the longer you invest. This illustrates that regular investing is worthwhile regardless of the amount invested. However, the more you invest and the sooner you start, the better the outcome.
What's the worst that could happen?
Like all things with investing, nothing is black or white. If markets start an extended long and strong run, you'll miss out on some of the returns simply because you didn't have all your money invested at the start. However, you'll still do well, and you'll do far better than if you were waiting for the right moment to start investing.
A surprising benefit
One way to look at regular investing is that while your timing will never be 100 per cent correct, you'll never be 100 per cent wrong. You won't be investing all your money at the worst time, so it's a good thing in the long-term if there's a period when the market falls, and you're regularly investing. You'll be buying at lower prices and acquiring more shares or units each month. This means that when the markets recover, you'll make greater gains because you'll have more units or shares than if you'd only invested before the falls. That said, taking a long-term view can be challenging emotionally. But if you can remain disciplined and believe the markets will recover, you'll be rewarded.
Some important points to consider:
Don't pay any fees for the privilege of investing regularly.
Retain control of when you invest, how often, how much and importantly, when you stop investing.
The key is to start. Rarely do markets look cheap, and it's easy to put off the decision to invest. However, regular investing reduces the risk and enables you to enter the markets gradually.
Be prepared to adapt and respond if the markets move significantly. A large fall is an opportunity to add more to your investment, so make sure you have a reserve you can add as a lump sum or to increase your regular amount.
Both of our portfolios at Clearwater can easily accommodate regular investments. The minimum initial investment is only $1,000, followed by a minimum contribution of $100 each month, which you can cease at any time. There are no fees, and by setting up a direct debit with your bank, you'll have complete control over your investment.
If you'd like to find out more about our funds, please click here to visit our website.
by Gary Lucas.