Investing for the long term is key to achieving financial success. This means having a strategy for investing your money over time, rather than attempting to time the markets. Systematically investing has two primary benefits, including dollar cost averaging and also letting time work on your behalf to compound total returns. Let’s explore how these two methods can help you reach your financial goals.
Dollar Cost Averaging
Dollar cost averaging (DCA) is an investment strategy in which an investor divides up their total capital into equal parts, and then invests those parts in approximately equal amounts at regular intervals. This means that no matter what the market does in the short run, you are effectively buying more shares when prices are lower and fewer when prices are higher. This helps minimize risk by reducing exposure to market prices at any single point in time. It also takes away the stress of trying to time the markets precisely because it eliminates guesswork from investing altogether – no need to worry about whether or not now is a good entry point. Over time, this strategy will even out your average share price as market volatility continues to fluctuate up and down.
Compounding Returns
The power of compounding returns should not be underestimated when it comes to investing for the long term. Compounding returns is simply reinvesting profits from previous investments so that your future gains increase exponentially over time.
For example, let’s say Investor A decides to immediately invest $12,500 into an investment which earns 10% annually. Investor A is 20 years old, and never deposits or withdraws any additional money. Investor B, also 20 years old, decides to delay saving for retirement because it will be easier to fit into their budget later in their career. Investor B invests $5,000 per year every year for 10 years starting when Investor B turns 35 years old, for a total investment of $50,000 with the same 10% annual return.
Investors A and B open their account statements on retirement day when they turn 65, and Investor B is amazed to find that his $50,000 investment has grown to almost $650,000! However, his excitement is short-lived when his friend, Investor A, reveals that his $12,500 investment has grown to over a million dollars during the same time period.
The longer you leave your money invested and continue reinvesting returns along the way, the more impressive and rewarding compounding becomes over time!
Conclusion
Systematic investing using strategies such as dollar cost averaging and harnessing compounding returns are essential components for achieving long term financial success. Taking advantage of these strategies can help protect against exposure in volatile markets while allowing investors to take full advantage of their potential earnings over time. Be sure to speak with one of James River Advisor’s qualified financial advisor before making any major investments so they can guide you towards reaching your financial goals! Contact Us Today!
Investing regular amounts steadily over time (dollar-cost averaging) may lower your average per-share cost. Periodic investment programs cannot guarantee profit or protect against loss in a declining market. Dollar-cost averaging is a long-term strategy involving continuous investing, regardless of fluctuating price levels, and, as a result, you should consider your financial ability to continue to invest during periods of fluctuating price levels.
Investing involves risk. Depending on the different types of investments there may be varying degrees of risk. You should be prepared to bear investment loss including loss of original principal.