Automate Investing to Harness the Power of Compounding

Saving money is a discipline, much like dieting to lose weight or keeping up with an exercise plan.

Investing can be too, unless you automate it.

In fact, automation is probably the only way to really succeed as a long-term investor.

Part of the reason is dollar-cost averaging. By investing automatically, you tend to get more shares when prices are lower.

More importantly, automation means you generally avoid market timing.

You are a buyer, in small steps, in hot markets and cold, good times and bad.

Steady investing is better investing, research shows. So how can you automate your investments?

Here are some strategies to consider:

• If you have a 401(k) or similar at work, join it. Set up the highest level of regular contributions you can stand. If you get a raise, increase it.
• If you don’t have a 401(k), open an IRA. Set up an automated transfer at your bank on payday. Aim high. Try to get money out of your hands and into a safe place consistently.
• Once the money is flowing in, automate your process. This might be a low-cost index fund or a target-date fund.
• If your income is high now and you have a lot saved, consider opening a Roth IRA. You might need a tax-free income if your retirement income is as high as your working years income.
• Any windfalls that come your way, like small inheritances or unexpected cash, immediately invest it. Get it out of your hands as soon as you can.
• As you get nearer to retirement, consider amping down your risk profile. But keep contributing and increase your contributions to take advantage of “catch up” provisions from the IRS.
• If you retire and your income falls, it might be a good time to convert IRA or 401(k) money to a Roth IRA. That way you reduce the hit from the conversion while lowering taxes in retirement permanently.

The single most powerful feature of any serious retirement plan, however, is time.

The stock market will return what it does, year after year. Time is the secret sauce.

Goals

The sooner you start, and the more you automate, the sooner you will get to your goals.

That might be $1 million in order to retire, or some smaller amount to pay off a home, or to finance an education.

The bottom line is that “someday” can sneak up on you. Saving late in life is harder, since you’ve lost the advantage of compounding over time.

You might be at your highest lifetime income level in your late career, but the real power of long-term investing is now decades out, maybe longer than you might live.

If for whatever reason you’re starting late, still automate.

But be realistic about return and make sure your contributions are sizeable enough to make an impact.

Remember, you’ll be investing for a retirement future in which jobs will be hard to get or impossible in your line of work.

Automating your investing is not foolproof. You do have to make sure you contribute enough.

But making the process hands-off can do a lot to ensure you reach your goals on time, and with less stress.

MarketRiders, Inc. is a registered investment adviser.  Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.  Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.