Automatic Investing

Automatic investing, often called dollar-cost averaging, is a simple, effective way to invest. Once you select an investment, you decide how much you will invest and how often. Then, you set up an automatic plan to invest a specific amount each month, by authorizing withdrawals from your bank account.

By investing regularly in up and down markets, you will buy more shares when prices are low and fewer when prices are high. This reduces your average cost per share and provides a simple way to invest a portion of your paycheck each month. It also removes the guesswork of trying to time the market.

A dollar-cost averaging strategy can reduce the risk of investing a lump sum in the market on a single day. By investing periodically, you spread your purchase price risk over multiple market periods.

Invest RegularlyAutomatic Investing

This chart compares automatic investments of $200 over 6 months. In March, more shares were purchased when the price fell; in May, fewer shares were purchased when the price rose. By investing regularly, you benefit from dollar cost averaging, usually lowering the average price per share.

Dollar-cost averaging does not ensure a profit, protect against a loss in declining markets or against a loss if you stop the program when the value of your account is less than its cost.

The Effect of Inflation

Because inflation affects your investment, you’ll need to consider the amount needed to meet your goal in terms of when you will use your investment, not in today’s dollars.

A million dollar IRA account provided a more lavish retirement in the 1980’s than it will today. The purchasing power of a $1,000,000 retirement account in 1980 had the equivalent buying power of about $2.6 million 30 years later in 2010, when corrected for inflation as measured by the Consumer Price Index. You will need to invest more now for more true value later. If your investment returns 7% over a year, but inflation is at 3%, the “buying power” of your investments grows by 4% (7% return minus 3% inflation).