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There are a lot of investing strategies you can use to successfully grow your wealth for retirement, but I prefer to keep things simple. When it comes to my savings, I don’t bother trying to time the market. Instead, I sit back and let this effortless strategy do most of the work for me.
Consistency is key
Every month, I set aside a percentage of that month’s income for retirement. Since I’m a freelancer, the exact amount varies over time, but the important thing is making regular contributions, on a schedule.
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This is known as dollar-cost averaging. It may not sound like a brilliant investing strategy, but there are a lot of good reasons to give it a shot.
First, it simplifies things for you. You don’t have to remember to make retirement contributions manually because you can set up a schedule and have the money automatically transferred from your paycheck or your bank account.
Most importantly, it enables you to pay a fair price for your shares without the risks of trying to time the market, or trying to buy when prices are low and sell when they’re high to maximize your profit. But this can easily go wrong. Even the best investors have difficulty knowing when an investment has hit its peak or bottomed out. And if you guess wrong, you could cost yourself a lot of money.
With dollar-cost averaging, you can feel pretty confident that you’re paying a reasonable price for all your shares over the long term. You buy on a schedule, regardless of the share price at the time. As a result, sometimes you’ll buy when prices are high, and you won’t get as many shares for your money. Other times, you’ll buy when prices are low, and you’ll get a lot of shares. These even out over time, and you end up paying an average rate.
Finally, dollar-cost averaging eliminates the need to check your portfolio often, which can help you avoid emotional decision-making. When you’re not seeing the daily ups and downs, you’ll be less tempted to buy or sell based on recent performance. That said, you should still check your portfolio at least once or twice per year and rebalance it as necessary.
How to get started
You may already be using dollar-cost averaging if you have a 401(k) or other workplace retirement account. These accounts enable you to place a certain dollar amount or percentage of each paycheck into your retirement account, where it’s invested in the funds you’ve chosen. If that’s the case, there isn’t anything else for you to do. Just keep contributing and remember to review your investments periodically to make sure they’re still good choices for you.
If you don’t have a workplace retirement account, you can still use dollar-cost averaging, but you may have to set things up for yourself. For example, if you open an IRA, you choose what you want to invest in. Then, see if you can set up automatic transfers from your bank account on a schedule that works for you. If this isn’t possible, you may have to make reminders for yourself to transfer the funds on your own.
It might feel like you’re not doing much, but that’s the beauty of this investing strategy: It’s not supposed to feel like work. And it can help you grow your wealth considerably over time. The sooner you get started, the greater the benefits you can reap from dollar-cost averaging.
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