Why it pays to make regular contributions to your investments
The secrets of successful investing are many and varied. But one of the most important is to make regular contributions. Like most things in life, establishing healthy, positive habits is essential to longterm success and happiness. In this respect, investing regularly is no different than eating sensibly and doing regular exercise. It can pay off.
Regular investing, especially if you decide to invest bi-weekly or monthly, enables you to take advantage of two powerful tools: dollar-cost-averaging and compounding. Both of these terms may appear technical, especially if you are a novice investor, but they are relatively simple to understand.
Dollar-cost-averaging is a regular investment strategy where you make investment purchases of a fixed amount on a bi-weekly or monthly basis. The strategy protects your portfolio by encouraging you to invest consistently, allowing you to buy more shares when the market is falling and fewer shares when the market is rising. In the end (assuming markets increase over time), your cost per share is more likely to be lower than the average price per share.
The second advantage of regular investing is that you build returns on the amount you invest each month as well as on the amount that money has earned. This is called “compounding” and it can have a potentially significant impact on investment performance.
Here’s how compound interest works, particularly with an RSP-eligible investment. With compound interest, you earn interest on both the principal (the amount you save) and the interest that principal produces. In other words, this means that an investment of $300,000 earning simple interest at 6% annually would deliver $36,000 after two years. With compound interest that same 6% would deliver $37,080. Doesn’t sound like much? Wait. After three years at simple interest you get $54,000. With compound interest, you get $57,305. And, as the years progress, the compounding effect multiplies.
The next move is to get started and make investing a priority. If you start earning a higher income, adjust the level of your contribution. The more you earn, the more you should invest. Don’t allow yourself to be distracted.
For more information please contact me @ 403-504-2780 or email me at HYPERLINK “mailto:matt.solberg@td.com” matt.solberg@td.com.