Your Money: Why it pays to make a regular contribution to your investments

By Medicine Hat News on March 17, 2018.

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 long-term 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 true value of dollar-cost-averaging is often realized during a down market. At this point, many investors stop investing for fear that it will fall further and wait for it to rebound. In most cases, this is exactly the opposite of what should be done. Dollar-cost-averaging forces you to put aside your “gut reaction” and continue investing consistently no matter what the current market is doing.

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. Compound interest is one of the most effective money making devices around. It’s like having the wind behind your back, pushing you forward.

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 per cent annually would deliver $36,000 after two years. With compound interest that same 6 per cent 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. He or she who hesitates is lost. Talk with a TD Wealth Financial Planner about a strategy that maximizes your regular monthly contributions. 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.

Now let’s talk about market “volatility,” or the rise and fall of the market. Market downturns are nothing new. And even quite dramatic falls are hardly rare. Markets, like life, have their ups and downs. The key is to keep calm, think rationally, check out reliable historical market information, and seek the help of a financial planner. Generally speaking, the most successful investors are those who stay the course.

One final thing, priorities change. So it’s wise to review your situation periodically, particularly in light of changes to your income, and as you grow older. Most people get more conservative as they age and, as a result, they prefer their investments to reflect that fact. For example, you may want to increase your contributions as you near retirement, or you might want to reduce your risk tolerance by modifying your mix of investments.

Your certified financial planner has an invaluable role to play. Keeping your investment strategy consistent with your personal financial goals is vital. And your certified financial planner can help you do just that.

For a further discussion around your investment and estate planning issues, contact Neil Mardian, M.Sc. (Mgmt) CFP at 403-504-3026 or neil.mardian@td.com

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