One of the principles of successful investing is to make regular contributions. In this way, you buy when asset prices are low and you also buy when they are high.
You don’t have to agonise over when to invest and, on average, your buying price will be lower over the long term. This is called dollar cost averaging and it’s easy to get started:
Many of us fall into the trap of paying everyone else first and then we only get what’s left over. This can be a bad idea when it comes to investing, because there’s often not much left over when everything else has been paid.
So, step one in establishing a regular savings plan is to pay yourself first. Even if it’s only 10% of what you receive, it’s yours. Then you can start paying your other bills.
Set aside a separate bank account to place that 10%. Don’t worry too much about which type of bank account; the interest you will receive is hardly worth spending the time doing comparison shopping. Just for the moment, develop the discipline to keep putting that 10% into a bank account that you know you won’t touch!
While you are saving, start looking for opportunities to invest your money to give a higher return. One of the better options early on is to consider investing in a managed fund. Managed funds pool your savings with thousands of other investors, giving ‘small’ investors access to a wide range of quality investments, managed on your behalf. These funds allow you to start investing with as little as $500 or $1000 which you can build on with monthly instalments that can be automatically transferred from your savings account.
This is where we come to the ‘science’ of dollar cost averaging. By investing the same amount every month your contributions are purchasing units on a regular basis, irrespective of the current market price. Over time, the power of regular purchasing has shown that investments are bought at lower average prices, giving you more units for the same outlay, which again compounds as you reinvest the returns.