Did you know that the best way to get rich is to start investing today? I know, this is a simplistic statement. However, many investors tend to wait and think, and analyse… but never pull the trigger. They wait to have enough money to invest, they think of the best possible strategy or stock to buy and they analyse the market trying to understand what is going on at the moment. Paralysis by analysis, have you heard of this?
The trick to catch every single bull market without failing
There is a very simple trick to catch any rides the stock market can give you; you simply have to keep investing your money. This strategy is often called systematic investing plan (SIP). The idea of using a SIP is to invest an equal amount per period. Depending on your saving rate, you could decide to invest on a weekly, every two weeks or monthly basis. This is a great way to average your cost and never buy too high or too low:
As you can see, there have been many small market drops in the stock market over the past 10 years. Catching them perfectly is impossible. By investing systematically, you will catch all of them. You will also catch higher entry points in the market too. Overall, the idea is not to be smarter than the market, but rather keep investing and staying the course no matter what happen. As it is clearly demonstrated on the graph, the stock market always wins. If you want to be part of it, just start your SIP.
Investing a lump sum each year would do the same, right?
I favor SIP over investing a yearly lump sum investment for several reasons. The first one is the possibility of setting your investing strategy on autopilot. You don't need to budget or think about your SIP once it is started. The money comes out of your account automatically and you get used to live without it. During years, you will be piling up tons of cash without really noticing it. Each time you get a raise, you can increase your SIP in the same amount and continue to live with the same lifestyle. You will only reach your goal faster.
The second reason why I prefer SIP over lump sum investing is that you can avoid "the unexpected". By experience, I noticed that each time I tried to invest with a lump sum instead of systematically, I failed reaching my number. The thing is that there is always something that happens where I need to use this money for something else. If the money is already invested, I will think twice before selling my holding. I will find another solution. Having money sitting in your bank account for a while also has this magical effect of finding ways to be spent. The temptation is gone if the money leaves your bank account on a monthly basis.
Technically, investing a lump sum amount each year will do pretty much the same thing as investing on a systematic basis in term of investing returns. However, life events could get in the way and prevent you from investing your money if you wait at the end of the year to do it.
Action of the day: budget
This may or may not take you lots of time, but if you want to invest, you should start by doing your budget first. There is no point of investing too much money and having to withdraw it a few months after you start the whole process.
The idea is to build wealth, not to go back and forth with your money. Open an excel spreadsheet, list all your expenses and your revenue sources and define an amount you can put aside according to how you get paid (weekly, every two weeks or monthly).