Talking about something and actually executing on it are two very different things.
It’s easy to come up with goals and hopes for you and your family – buying the dream home, ensuring your kids get a good education or maybe just looking forward to retirement.
But each of these goals has a price tag and those costs seem to be getting higher each year.
As a general rule, people usually need 70-85 per cent of their current annual income to meet their needs in retirement. The ability to establish a nest egg big enough to handle that could be challenging and will likely take hundreds of thousands of dollars.
But there are strategies to overcome the daunting nature of saving that much money that may help you accumulate significant savings gradually over time.
The strategy is “dollar cost averaging”.
Dollar cost averaging involves investing a fixed amount of money at regular intervals over the course of your working life.
How does dollar cost averaging work?
The strategy is actually very simple, but requires a bit of discipline on your part. You need to stop thinking about investing as a chore and start turning it into a habit. But how?
Well it all comes back to the idea of paying yourself first. Besides your salary, it’s important to take $100 or $200 per month, for example, and have it automatically invested from your personal account to a mutual fund account.
Doing this allows your money to be saved rather then spent. You’ll find that if done automatically each month, this money is rarely missed from your every day expenses.
The amount and frequency of your investments depends on you. You might choose to deduct funds every month or every quarter. Your goals and current needs will help shape those decisions.
Can’t I just try to “time” the market instead?
Even the most seasoned and disciplined investors on Wall Street cannot time the markets. “Buying low and selling high” is a conventional wisdom that works, but what’s often not mentioned is that it’s very hard to know when markets are at their lowest lows or highest highs.
Dollar cost averaging helps smooth out that process. If your monthly investment buys shares in particular stocks or units in a particular mutual fund, you will be able to buy fewer shares when stocks are high but more when prices are low. The idea being that over time, the average cost per share will end up being less than the average share price.
Using dollar cost averaging to achieve your goals
The good news is that dollar cost averaging creates a disciplined approach of investing. These investments, even in small amounts, can accumulate quickly over time and help with meeting or reaching your future goals.
The not-so good news is that profit is never guaranteed.
Dollar cost averaging is a good way to be disciplined, but profit can rise or fall depending on market cycles. Since this strategy depends upon continuous investment regardless of fluctuating price levels, you should plan for how you will afford to continue making investments through periods of low price levels.
How do I start dollar cost averaging?
Foresters Financial offers several automatic investment programs to help you benefit from dollar cost averaging. You can invest in a range of products—mutual funds, annuities, life insurance—through our automatic investment programs.
We also allow a lower initial investment amount to clients who sign up for an automatic investment program.
Our Automatic Payroll Investment Service enables clients to transfer a portion of each paycheck to their Foresters Financial account on each payday. If you’d like to learn more about these options, please feel free to contact one of our advisors and they will be happy explain!