The Benefits of Regular Investing
The most efficient way to make regular investments is to have contributions taken directly from your paycheck or bank account. Actively participating in a workplace retirement plan is a convenient way to do this – especially if your employer matches your contributions. Putting your investment contributions on autopilot allows you to set it and forget it. The savings will happen automatically.
But making regular contributions to your investment account has other benefits, too. Mutual fund and ETF share prices always fluctuate with changes in market conditions – sometimes a little, sometimes a lot. When prices rise, so does the value of your account, but your monthly contribution buys fewer shares at the higher price.
However, when prices decline, the same dollar amount purchases more shares. This is one way investors who stick with a regular investment program can come out ahead. The chart shows how contributions of $1,200/month could affect an account’s value over the course of a challenging year in the markets.
Dollar Cost Averaging: $1,200 Monthly Investment Buys More Shares When Prices Fall, Fewer When Prices Rise
Dollar Cost Averaging Across Changing Markets
Regular investing, known as dollar cost averaging, can reward patient investors even under flat or difficult market conditions. In this example, the share price ended the year where it started, at $20, but the account gained in value by 15%.
- Average price per share: $17.08
- Average shares purchased per month: 69
- Total shares purchased: 828
- Total invested: $14,400
- Account balance after 12 months: $16,560
- Total gain for year: $2,160 = 15%
Dollar cost averaging cannot guarantee a profit or protect against losses.