By Craig Erwin, Ph.D. 11-14-20
The best way for most people to accumulate wealth is to invest regularly and automatically in an equity (stock) mutual fund. To do so, it’s wise to enroll in a workplace retirement savings plan, if one is available, because then you can get a tax break and your employer might even match the amount you save. When you enroll, select an equity mutual fund with low fees, such as an S&P 500 Index fund, as the destination for your contributions. That’s all you need to do. Then, just get out of the way and let the contributions continue, paycheck after paycheck, month after month, year after year.
If you take these simple steps, you will accumulate wealth steadily, automatically, and effortlessly, with no need to make any more decisions (after you decide to start). Your contributions will enable you to accumulate more and more stocks, without worrying about the news or stock market conditions or whether it’s a good time to buy or sell. The savings account you started will do everything for you; no maintenance required. And the less you mess with your account, once you start automatic contributions, the less likely you are to make a stupid and costly mistake.
The method described above is called dollar-cost averaging, and it works amazingly well. At times you will pay higher prices, but the bargain-basement prices you pay at other times will offset them. On average, you will pay a fair price. And, no matter what price you pay, you will just keep accumulating assets (items of value like stocks and bonds), likely to be worth more in the future. If you want to retire comfortably someday, your goal should be to accumulate as many assets as possible, especially ones likely to increase in value.
The dollar-cost averaging method will enable you to keep investing no matter how bad the news gets, which you must. But it’s very difficult to stay the course when you panic and let emotions drive your decisions. When the news is especially frightening, it is very tempting to stop everything, including automatic contributions. But discontinuing your contributions is always a terrible idea, so don’t even consider it. Once the automatic contributions start, you should never change them (unless you increase them).
When the news is especially terrible, you will likely pay bargain-basement prices for the stocks you buy (without having to think about it or make a decision), which will enable you to generate wealth faster. And you will be able to do it without losing any sleep because, after you enroll, everything will continue automatically forever.
Do you know what has the greatest effect on the amount of wealth you accumulate? How much you save. So start saving, keep saving, and don’t ever stop saving.
So what’s the hardest part about using the dollar-cost averaging approach to accumulate wealth by automatically saving money regularly? Getting started. But even getting started is actually quite easy. And everything else is effortless. Even though it’s one of the most important actions you will ever take and it’s easy to get started, unfortunately, many people never start and many start way too late. And the longer it takes you to get started, the less wealth you will accumulate.
So, don’t wait another minute. Start now. Set up an automatic savings account and then leave it alone so it can work its magic through dollar-cost averaging. It’s one of the smartest actions you will ever take. And you will never, ever regret it.
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