We have discussed the benefits of compound interest in our previous articles. Supported by the concept of compound interest, one fundamental principle of investing is to invest your money as early as possible. This is because investment takes time to grow, so the longer your money stays invested, the higher the chance for it to grow substantially over time due to compound interest. Some may opt to invest a lump sum as early as possible. Nonetheless, for investors with no sizeable investment capital, making regular investments can also work in your favour. One such investment technique fondly recommended by Warren Buffett, the investment guru, is known as 'dollar averaging.'
So what is dollar averaging?
Dollar averaging is an investment technique where we invest the same amount of money in the same investment at fixed intervals over time (e.g., every month or every quarter). It is ideal for individuals who prefer to deploy their capital gradually. For instance, you could invest RM2,000 every month by fixing the investment interval (e.g., invest on the first working day of every month).
There are strong suggestions in favour of making regular investments such as dollar averaging.
1. Smooth the market fluctuations.
The financial markets are so unpredictable and hardly move in a straight line given the price volatility. With a regular and long-term investment plan, you lower the risk by smoothing out the market's highs and lows. This is because by investing a fixed amount at predetermined intervals, you could invest across a different range of prices. Over time, you obtain an average price and benefit from a stable return without wondering if you have opted for the right moment to invest.
2. Develop investing discipline.
Many investors try to time the market, which could be a tricky investing/trading strategy even for professional investors. Given that there are so many factors involved, nobody can persistently predict how the prices could change. A regular investment plan allows us to determine when, how often, and what fixed amount we contribute to ensure that investing remains a priority throughout the year, not just during specific periods. Therefore, investing regularly rather than trying to time the market could help us become a more disciplined investor, given that it removes some emotions from investing.
3. Not influenced by emotions making investment decisions.
This point is related to point 2, but we believe it is worth emphasising. The most common mistake of investors is allowing their emotions to control their investment decisions. When asset prices are falling, and the economic outlook is gloomy, not many investors could manage their fear and anxiety to avoid panic selling. When asset prices rise sharply, it is also easy to succumb to investor euphoria where we could take unnecessary high risks when investing during that time. A regular investment plan could help us control our emotions and not to be easily influenced by market fluctuations. Using the dollar averaging strategy, we keep investing the same amount at a fixed time interval, regardless of whether the prices are falling or rising.
4. Making investing more accessible.
For someone interested in investing but do not have sizeable capital, devising a monthly investment plan could help us start investing early rather than needing to save up a lump sum first.
Regular investment may be an exciting option, especially when the savings accounts' interests are at a historic low. If we want to improve the return on our savings and take a first step in the investment world but (1) not sure whether the market timing is right and, (2) do not wish to invest in a lump sum, regular investing could be your choice.
Let's invest regularly and let the money grow abundantly.