People often fear investing in the stock market because they worry about buying at the wrong time and losing money. Also, some may believe that they do not have enough money to invest systematically. This 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 produced much higher returns than savings accounts, certificates of deposit, and other guaranteed accounts.
The good news is, you don’t have to be rich or a cafeteria genius to be a successful investor. You don’t need a lot of money either. All you need is a little discipline, patience, and realistic expectations, as well as an understanding of the basics of systematic investing.
If you have one 401 (k) You are already participating in systematic investments in your workplace. Aside from knowing that money comes out of your check every pay period to help finance your retirement, you may not know a lot about how that works. This story will explain that. Those looking to set up their own business by opening their own brokerage accounts and making their own investment decisions also have a better understanding of how this can be achieved.
Systematic Investing Principles
Systematic investing (also known as Averaging the dollar cost) takes away the futility of trying to get the market out of the picture. If you buy the same amount of money every month, you buy more stocks when prices are low and fewer stocks when prices are high. You also build wealth by regularly saving money.
A systematic investment strategy is simply to invest a set amount of money in the same asset on a regular basis – or it can be called a contribution – to help average out the costs. Let’s say you budget $ 100 a month to buy a fund that trades at $ 10 a share. This month you will buy 10 shares. If the stock moves to $ 5 per share, you get 20 shares for the same $ 100. Likewise, as the share price increases, you will buy fewer shares. You will worry less about the market as you build your account as either your account will increase in value or you will buy more stocks for the same amount of money.
In the future, the account will be more influenced by market developments than your regular monthly purchases. But by then you have a sizable nest egg.
Does Systematic invest for you?
Systematic investing is best for investors who can put money aside for an indefinite period of time (for the benefit of children or grandchildren) or for at least 10 years. This is especially suitable for young investors in their twenties and thirties who are starting to save for retirement. If you are, speak to a tax advisor about setting up your account.
You will not become an instant millionaire with systematic investments, but that is not the goal. The aim is to achieve a higher return than inflation in the long term. By investing every month, you don’t have to worry so much if the market falls. Low stock prices will help you. When prices go up, you get richer.
As you build your systematic investment account, you will reap the benefits of Compounding. Then your money will work for you instead of working hard for every dollar.
7 ways to stick to your investment plan
The hard part will always stick with your investment strategy. Brokerage firms want quick traders. Financial news channels and websites always want something fun to say. There are many stories online about people getting rich quick, and the downside are the ones that scare potential investors.
Don’t buy into the hype. Don’t be upset or panic if your portfolio suddenly grows or shrinks. Markets will go up and down, but the chart below reminds us that the S&P 500 Index has seen an upward trend over the long term. Check out our 7 ways to stick with your investment strategy below.
1. Budget an amount that you can invest each month
Decide on an amount that you can set aside each month. It is better to underinvest initially than to skip a month or, worse, withdraw from the account. You can always increase the monthly amount as your income increases.
2. Find a good, diversified fund with a low cost
Choose a fund that invests in a wide variety of industries so that your performance doesn’t depend too heavily on fads. Funds that mimic that S&P 500 index are often inexpensive and easy to follow. If the S&P 500 index is up, you know your fund has gone up and vice versa. If you are concerned that the stock market is getting too volatile, you can invest in a fund that includes the following tie up. These funds are likely to be more stable, but likely to generate less return than a pure equity fund.
You also need to check that the fund’s minimum investment is within your budget. Some funds have high minimum investments. You can avoid this by buying index funds that are traded on the stock exchange ETFs.
Open a brokerage account that allows you to make automatic deposits and automatic purchases.
3. Find the right brokerage account
Several online brokers offer low or commission trading and automatic purchases. Open an account with the minimum deposit required. Then set up a recurring deposit from your checking account and place a recurring order that will automatically purchase the same dollar amount.
Robin Hood offers all of these features and has low minimum requirements. Take advantage of these account features and ignore the speculative advice that encourages you to trade more often than necessary. Stick to this strategy and take advantage of the savings Robinhood and similar brokers offer.
4. Set up an automatic deposit
Depending on the brokerage company and your bank, you may be able to set up an automatic payout from your bank that goes straight to your brokerage account. If necessary, you can instruct your bank to automatically send money to your brokerage account as if you were automatically paying a bill.
5. Set up a recurring purchase order
Set your brokerage account to place your recurring purchase order a few days after your auto deposit hit to ensure the cash is available. This will prevent your monthly purchase order from being rejected. When prompted, the type of order should be “on the market” to ensure that the order is fulfilled at the market price. In the case of limit orders, the share price must be at or below a price you specify. If the stock price is above this limit price, trading will not take place. That would ruin the whole point of the strategy.
6. Make sure everything is working fine
Watch your brokerage account to make sure your bank funds are deposited on the correct day and your order is fulfilled. Do this every month.
7. Be patient and watch your wealth grow
It’s not uncommon for US markets to suddenly rise or fall. It is possible that your account will be unavailable for several years in a row. That shouldn’t put you off, because you’ll be investing long enough to offset the effects of a long-term decline. As long as your money rises more than falls during the entire time you follow this plan, you will benefit from rising markets and disciplined saving.
Contributor Sam Levine is a certified financial analyst and chartered market technician and has been writing on financial topics since 2003. He is an Associate Professor of Finance at Wayne State University in Michigan.
This article originally appeared on www.thepennyhoarder.com