In the world of investing, consistency is the key to accumulation. Wealth accumulates over time as you add more principal and continue to compound the returns. To do this, many people rely on systematic investing. What is systematic investing? While it can take many forms, the core concept is simple: continuous investing on a regular schedule.
Investors have several options when it comes to systematic investing, and certain investment products lend themselves well to consistent contribution. Here’s a rundown of the systematic investing method and how to capitalize on scheduled contributions.
Systematic Investing Plans (SIPs)
A systematic investing plan is straightforward and simple for any new investor to understand. It involves a preset investment amount, contributed at regular intervals for a sustained or predetermined period of time. Here’s an example:
Miles has $500 budgeted each month for investing. On the first of each month, he contributes that amount to his Roth IRA. At the end of the year, he’ll have met the $6,000 investment threshold for his IRA and maintained a consistent contribution rate.
Some investment vehicles, like a mutual fund or employer-sponsored 401(k), require regular contributions from members. Other SIPs are user-defined, like the above example, which means investors choose to determine their own investment amounts and schedule. In either case, the concept works the same: small contributions invested consistently add up to compounded growth.
Systematic Investing Strategy Examples
SIPs rely heavily on the power of compound interest. Those familiar with the concept will understand that even small amounts of money invested over long periods have incredible power to return wealth. For example, $250 invested monthly for 40 years at an average rate of 8% will result in $872,751 for shareholders ($120,000 contributed, $752,751 interest).
There are ways to make systematic investing work even harder for you. Namely, through dollar-cost averaging and dividend reinvestment.
- Dollar-cost averaging is the practice of buying more shares at a lower price to lower the average aggregate investment price. If you buy 100 shares of XYZ Company at $50, then buy 100 more shares later at $40, you’ll own 200 shares at an average price of $45. Averaging down increases the earning potential of all shares as they appreciate over time. An SIP will naturally dollar-cost average depending on the price of the security at the time of a scheduled investment.
- A dividend reinvestment plan (DRIP) takes the regularly issued dividends of a company and channels them back into more shares automatically. This is a type of systematic investing that’s automatic. Each dividend purchases new shares, which create new dividend payments. It all snowballs into a cycle of compounding that creates exponential wealth (so long as the company maintains a dividend).
The name of the game for systematic investing is to generate compound interest. Regular additions to your principal investment equate to more compounding power over time. Dollar-cost averaging and dividend reinvestment further enhance the earning potential, resulting in strong ROI over a longer time horizon. It all starts with consistency.
The Benefits of Systematic Investing
Systematic investing comes with some powerful benefits. Here’s a look at what investors stand to gain from being consistent in their contribution amounts and schedules:
- A stable investment average protects investors from short-term market fluctuations. If you contribute $500 each month, your buying power fluctuates with the market. If ABC Company’s stock is $20 in January, you can buy 25 shares. But if that price falls to $10 in February, your investment shrinks but your buying power increases to 50 shares at $500. This is effectively dollar-cost averaging.
- Lump sum investing (the opposite of systematic investing) is sporadic. It’s much easier to invest $250 every month than to wait until you have $5,000 to invest. The sooner you put your money in the market, the more time it has to appreciate and compound. While lump sums offer greater buying power, they’re too infrequent to capitalize on.
- Systematic investing also helps investors stay consistent. Getting into the habit of investing keeps you honest. It’s easy to contribute a set amount each month and budget for that amount as opposed to investing at random.
In the right investment vehicle, the compounding power from consistent investment becomes an incredible tool for generating wealth. Check out our investment calculator and see for yourself! Even small investments within an SIP enhance the compounding power of an account and the ROI of every compounded period. From individual stocks to ETFs and index funds, systematic investing enhances accumulation. The longer the time horizon, the greater the returns.
The Key Takeaways of Systematic Investing
What is systematic investing? On the surface, it’s an opportunity to invest a set amount of money on a set schedule. At its core, it’s a habitual way to start compounding your wealth. The beauty of systematic investing is that every addition to principal, no matter how small, empowers greater compound interest.
Systematic investing over a long period of time offers more consistency than lump-sum investing. Moreover, the longer your money stays in the market, the more earning power it has. Factor in strategies like dollar-cost averaging, and a systematic approach offers even more benefits. It’s not as flashy or exciting as investing thousands at a time, but it’s a more reliable way to make your money work for you.
Invest now. Invest regularly. Create a schedule and stick to it, and you’ll quickly find yourself sitting on a growing portfolio that’s contributing to your wealth and retirement prospects. Sign up for the Investment U e-letter today for expert stock analysis, insights and more.