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Let’s face it, learning to invest can be scary. The thought of investing can often seem like giving away your money with no idea when that money will return. On the other extreme, it could feel exciting, like you are on the verge of earning a large payday. While it’s natural to be apprehensive when you’re just learning to invest, letting your emotions get the best of you could cause you to withdraw your money from the markets before you have a chance to earn anything. On the flip side, becoming overly-excited or confident could cause you to make irrational decisions as well. As a general rule, it’s best to leave emotions out of the equation when it comes to investing. One way to do it involves a strategy called automatic investing.
Automatic Investing Like an Intelligent Investor
A few years ago, I read a book and it has shaped the way that I invest ever since. In the book, the author Benjamin Graham, recommends a diligent, steady approach to investing. For example, income investors diligently consider future dividends when looking for dividend paying stocks. Choosing to automate your investment plan following a diligent, steady approach can help to remove emotions from your investment strategy, and help you become a more intelligent investor.
How To Invest on a Regular Schedule
Investing on a regular schedule makes the process of investing an automatic activity. As measured by the S&P 500, over the last ten years, the broad market index has returned 6.8% on an annual basis, including dividends. While past performance is no indicator of future results, and all investing involves risk of loss, this example can help paint the picture. An investor that chooses to buy and sell based on concern and excitement, might see investment returns different from the broad market index; especially since the market has seen some significant highs and lows over the last ten years. Let’s take a look at how a monthly deposit could change things.
Depositing on a Regular Basis
Depositing just $100 per month on a consistent basis is better than sporadic deposits. Here’s why. Automatic investing removes the human element. The easiest way to create a monthly deposit plan is to use the percentage system. With this system, you portion out your necessary expenses, rent, utilities, etc, and then you take a percentage of the remaining income for goals. If you have $500 per month remaining after your bills are covered, then a twenty percent investing goal would allow you to put $100 away each month for investing.
Take Advantage of Free Money
Your employer can also help you invest on a regular basis. If your employer offers a retirement plan such as a 401(k), check to determine if they also offer a matching contribution. A matching contribution works like this: when you choose to put away a portion of your salary into an employer sponsored 401(k) plan, the employer will choose to contribute as well. The "match" depends on the specifics of the plan. Some employers will contribute dollar for dollar while others may contribute 50 cents for each dollar you contribute. Then, check to see what funds are offered as options in that 401(k). Each time you receive a paycheck, your choice of contribution percentage is automatically deducted from your paycheck and allocated to the funds that you choose. And if your employer matches your contribution, then you are getting additional free money towards your retirement fund.
Emotions can cause you to make irrational decisions when it comes to money. But learning to invest without those emotions is possible. An automatic investment plan can help you begin building your confidence and a nest egg as well.
Originally posted 2015-12-16 10:00:02.