Investing: a Plan of ACTION
Consistent savings into your portfolio has many benefits. Regular inflows can help you reach your financial goals faster, and help your portfolio stay balanced, reduce its risk, and lower transaction costs. Here's our plan:
- Use the power of time and savings. With the "Rule of 72" you divide the expected rate of return into 72 to see how long it'll take for an investment to double (72/8% = 9 years). The "Rule of 72 + You" adds your savings to the equation and demonstrates how you can accelerate these results.
- Use ongoing contributions to maintain your portfolio's balance. Just like an old-fashioned lawn sprinkler needs to be moved around to prevent over-watering, ongoing savings work the same way. Periodically review what investments are being bought and if any changes need to take place. This can help save time and costs of rebalancing through buys and sells.
- Shift your asset allocation with ongoing contributions. Similar to above, but ongoing savings are used to slowly move a portfolio to a more conservative allocation (move from a 60-40 to a 55-45). Don't forget about dividend reinvestments. They are contributions too.
- Avoid dollar-cost averaging into ETFs and mutual funds if you're going to be hit with transaction charges. Most low-cost, no-load mutual funds and ETFs trade with a transaction fee at discount brokerages. Decrease transaction charges by saving up 4-6 months worth of contributions before you buy a fund.
- Larger windfalls should be handled according to your comfort level. Some people may prefer to just deposit the whole amount while others may want to some utilize periodic purchases to ease into the market. Lump sums usually perform better, but dollar-cost averaging tends to avoid bad timing. Comfort is key.
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