A systematic approach to investing can help you reach your goals.
Some investors devote money to their savings intermittently—or only after setting aside a lump sum of cash in a savings or checking account. For many, a more effective course of action can be to invest even small amounts regularly and consistently so that money goes to work right away. You may already be doing this as part of a workplace retirement plan, but you can use the same principle of regular, set contributions to fund an individual retirement account (IRA), or to target goals such as college tuition or a down payment on a home.
With a systematic strategy, you're approaching your investing without additional action needed after the initial setup. Says Judith Ward, CFP®, a senior financial planner with T. Rowe Price, "Having monthly contributions automatically deducted from your paycheck can remove many of the obstacles faced by some investors—especially those who see saving as a chore or who are uncomfortable making investment decisions."
Starting a systematic investing plan has a number of benefits that can help you reach your goals.
The emotional factor. Systematic investing removes temptation and emotion from your financial plan. You contribute consistently every month without concerning yourself about global events and sudden shifts in asset prices, times when some investors may be inclined to buy or sell based on emotions or headlines. Having a set amount of money automatically transferred into your portfolio each month also means you won't put off investing until you feel you have enough money to make it worthwhile—and you won't try to the time the market.
Pay yourself first. Systematic investing helps by allowing you to treat your investment goals like any other monthly bill. You set up your plan to deduct a certain amount, just as you might set up an electronic mortgage or utility payment. And there's no chance of forgetting to invest, or inadvertently using the money for another purpose. "This way, you are paying yourself first," says Ward. "The money is taken out of your paycheck or bank account automatically, so you know for certain you are saving for your financial goals. You're not waiting to see if there is any money left over each month before you save."
The compounding factor. A key benefit to systematic investing is the potential for compounded returns. As your shares earn interest or dividends, that money is automatically reinvested to buy additional fund shares. You can increase the effect of compounding even more when you use a systematic investing approach within tax-advantaged investments such as a 401(k), Roth IRA, Traditional IRA, or 529 college savings plan.
For illustrative purposes only. This is not meant to represent any specific investment.
Your results will vary.
Systematic investing does not assure a profit or protect against a loss in declining markets. Since the benefits of a systematic investing program are realized over time, you should be prepared to stay the course during periods of low and high prices.
STEPS TO INITIATING YOUR STRATEGY
Here are the steps to setting up a systematic investing plan—and the advantages it offers:
- Determine Your Goal
Ask yourself how much you will need to reach your goal and whether you're saving enough to achieve it. Estimate, for example, what a house down payment will be, or how much money your child might need for college tuition. Even if you can't save the entire amount, you will know what percentage of your goal you can realistically fund. The more tangible you make your financial plan, the better chance you have of actually succeeding with it. For goals such as retirement, which may be more difficult to estimate, use a generally accepted rule of thumb, such as saving 15% of your salary each month.
Build an emergency fund. Use a systematic approach to accumulate three to six months' worth of your take-home pay in accessible, short-term investments such as a savings account or money market investment.
- Implement a 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. By contributing the same amount of money consistently—both when the market is rising and when it's falling—you automatically buy more shares when prices are low and fewer shares when prices are high.
As shown in the Systematic Investing in Action chart, you may lower your cost per share—the average price you pay for an investment—compared with an investor who buys only when prices rise. Buying some shares at a lower price means your assets have more growth potential.
- Monitor Your Progress
Although your savings strategy will be in place once you start, and you'll be making contributions automatically, take time on a regular basis to see the progress you're making. Ask yourself if you're on target and whether you need to increase your contribution amount to reach your goal.
A CONSISTENT STRATEGY
Systematic investing cannot guarantee that your portfolio will earn money during turbulent economic times. A consistent strategy, however, can give you great peace of mind. "You won't have to ask yourself what the market is going to do and when to invest," says Ward. "You will already be on track toward saving for your goals."
T. Rowe Price's Automatic Asset Builder
You can use T. Rowe Price's Automatic Asset Builder for your T. Rowe Price accounts.
- Automatically deposit money each month into your selected accounts from your checking account or paycheck.
- Easy enrollment—and T. Rowe Price handles the details. You don't need to write any checks or fill out investment slips.
- The minimum monthly transaction is $100 for most accounts; contributions for certain college savings plans are lower.