Make Investing a Habit
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To reach your savings goals, you have to incorporate investing into your budget and financial plan. Here are some easy ways:
Dollar-cost averaging is a reliable way to smooth out the ups and downs of the stock market. You invest a fixed amount on a regular schedule: $25 a month, $50 a month, $500 a month—whatever fits your budget. Your fixed number of dollars will automatically buy more shares when prices are low than they will when prices are high. As a result, the average purchase price of your stock will be lower than the average of the market prices over the same length of time.
Dollar-cost averaging won't automatically produce a profit. But by investing on a regular schedule and sticking with your plan, you're virtually guaranteed to do better in a generally rising market than investors who try to sell at the top and buy at the bottom. History shows that the odds are strongly against that kind of timing.
DRIP (Dividend Reinvestment Plan) investing lets you buy small amounts of stock on a regular basis without going broke paying the commissions. A growing number of companies are willing to sell shares directly to investors, thus allowing you to bypass brokers' commissions. These programs make you eligible to participate in the company's Dividend Reinvestment Plan.
No-load mutual funds are ideally suited for dollar-cost averaging. There are no sales commissions when you buy, and you can invest a small (or large) amount of money on a regular schedule, even if your dollars buy fractional shares. Funds will let you have money transferred regularly from a bank account.
Your financial plan should be flexible. The time may come when you want to revise your strategy. Retirement, for instance, may be a time to lighten up a bit (but not entirely) on stocks, and emphasize income-oriented investments such as bonds.
Avoid abrupt changes in direction, and don't try to time the market. You can change your asset mix gradually by allocating new investment money from savings, dividends and interest to the category you want to increase.
Have realistic investment expectations. Investment expectations are easy to exaggerate by fixating on an investment's most favorable period—the stock market in the 1990s, for instance, or the real estate markets in the 1970s. On the other hand, it’s easy to belittle the potential by focusing on severe down markets as in 2008.
On average and over the long term, a total return of 8 to 10 percent per year on your investments—that is, the sum of dividends and interest plus price increases of your holdings— is a reasonable, achievable expectation. Some years you will do better, some years worse. Even with the Great Depression and the Panic of 2008, stocks have produced an average return of about 10 percent since 1926.