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When it comes to investing, both beginners and experienced investors typically face two choices: either invest all their money at once (lump-sum investment) or make regular investments of a fixed amount of money (cost averaging). This article will focus on regular investing, as it can provide various advantages that contribute to the gradual accumulation of long-term wealth and overall financial well-being.
Timing the market can be challenging, so some investors turn to regular investment plans that allow them to gradually build their investment portfolio rather than investing a lump sum all at once on the stock market (or other markets, for that matter).
This technique is often referred to as ‘dollar-cost averaging’. If you live in the United Kingdom or the eurozone, you might know this concept under a different name, such as ‘pound-cost averaging’ or ‘euro-cost averaging’.
Investments made regularly over a certain period of time, like monthly investments of equal amounts of money, can help investors deal with short-term market volatility and fluctuations. This is just one of the many advantages of this investment approach. Let's have a look at them now.
Dollar-cost averaging is particularly well suited for beginners, time-poor investors, and those with smaller amounts of money to invest.
While you can start small, you will likely increase investment over time, depending on how your professional and financial situation evolves. In addition, most regular investment plans do not have any requirements about the systematic payments you have to make to invest money regularly.
Overall, small regular investments can lead to the gradual accumulation of a specific asset like a stock or an ETF, which will result in a growing portfolio over time. Moreover, the low barrier to entry of regular investing means that everyone can start investing.
Regular investing is a powerful tool to cultivate financial discipline. It gives you a sense of routine in your financial habits, with consistent contributions becoming a financial commitment. You can also use automatic transfers to your investment accounts to help you implement a systematic approach to saving and investing.
Through investments made at regular intervals, this investment strategy also allows you to adopt better financial and investment habits, as you will first need to learn how to make regular savings to be able to invest part of it in the financial markets to reach your long-term investment goals.
Regular investing harnesses the power of compounding because it allows you to profit from the exponential growth of not only the increasing value of your investment itself over time, but also of the reinvestments of your returns (interests, dividends, capital gains and more).
Instead of withdrawing the returns you get from your investments, compounding means that you will reinvest them back into your portfolio, which gives you a larger investment base. This can, in turn, potentially improve the rate of return of your investments.
Given the challenge of pinpointing the optimal timing to buy assets in volatile markets, the regular investment strategy can help reduce the average cost and price of the asset you're investing in over time.
By consistently purchasing the same assets at various market prices, the average price of this asset decreases, and the associated costs are spread out over time. This approach ultimately provides potentially more favourable conditions for you as an investor.
While one might think that emotions only come into play in investing when investors face market turbulence and extreme movements triggered by strong sentiments like euphoria or panic, investors are always influenced by emotional, psychological and cognitive biases in one way or another if they do not learn how to manage their emotions.
By minimising the need for frequent decision-making, regular investment automatically reduces the influence of emotions on your investment choices. In that case, your investments are made consistently, irrespective of short-term sentiment or market trend, as you contribute regularly with a long-term perspective aimed at reaching your financial goals.
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