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General Investing

Keep Emotions in Check—Automatically

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During market uncertainty, we often hear from clients that they’re tempted to change or abandon their investment plans. But those plans were put in place for a reason: to ensure you stay invested toward your future, no matter what the markets are doing.

Nevertheless, market and economic headlines have a real effect on investor confidence. Instead of knee-jerk reactions, focus on what you can control. Make sure your portfolio risk level matches your goals, time frame and tolerance for market ups and downs.

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You also control when and how much to invest. One important part of your overall financial plan should be regular investments into your accounts. Setting up automatic or systematic investments—monthly, or per pay period, for example—can help you build your assets over time, regardless of market conditions.

How Automatic Investing Works

When it comes to your long-term plan, consistent may be better for you—emotionally and financially. Here’s why.

1. Take the emotion out of investing.

When you set up and stick with an automatic investment plan, you won’t be as tempted to buy and sell based on headlines. Studies have shown that remaining invested in the market consistently over time can result in better returns. How? If you miss even a few of the market’s best days, your account balance might be lower than had you stayed invested the entire time (even through the worst days).

2. It’s easier to stick to your plan.

Retirement and other long-term goals require large amounts of money and a disciplined plan to get there. If you’ve ever calculated how much you might need for retirement or other long-term goals, you know that it’s best to start early and invest regularly.

Why do 401(k)s and other workplace plans offer automatic deferrals from each paycheck to save for retirement? Because it works. Automatic investing doesn’t guarantee that you’ll reach your ideal retirement amount, but it does provide a hassle-free way to save and stay committed to your future.

3. Benefit from dollar-cost averaging.

Instead of chasing (and hoping for) the best purchase price, consistent investing allows you to “collect” and average your purchase prices over time. This strategy, called dollar-cost averaging, helps you manage during varying market conditions during your lifetime.

Suppose you invest $100 a month in a mutual fund and purchase shares at a variety of prices. At the end of the six months, you own 34 shares that cost $600 and your average cost per share was $17.65 per share ($600 divided by 34 shares).

But if you had invested the full $600 in the first month, you would have bought only 24 shares at $25 each. With dollar-cost averaging, you bought 10 more shares and reduced your cost per share by more than $7.

Dollar Cost Averaging Example Table

Of course, the opposite is true had you invested $600 at $12.50 per share. But over years of investing, it’s impossible to have perfect timing for every purchase. Consistent investments and dollar-cost averaging will help you even out the high and low share prices while staying invested for your future.

4. Build investments gradually over time.

The more time you have for your money to grow and compound, the more likely you are to reach your long-term goals. Compounding—when you earn money on your original investment and on any earnings for that investment—has a powerful effect over time. And bumping up your contributions over time (from annual pay raises, for example) helps you build your assets even more.

Example of Compounding

These are hypothetical calculations assuming a $2,500 initial investment and monthly (or weekly) investments over 40 years with a 6% return rate. Assumes reinvestment of all gains, dividends and interest, and does not include fees, expenses or taxes. If all taxes, fees and expenses were reflected, the reported value would be lower. Source: American Century Investments Future Value Calculator. Financial Calculators from ©2020 KJE Computer Solutions, LLC.

One Investment Versus Many

There are times when investing a single, larger amount makes sense: inheritance, gift, tax refund, proceeds from a sale, etc. Investing it all at once can ensure you use the money for your future rather than spending it today.

But occasional lump-sum investing assumes you have large amounts to invest, and this strategy’s success may hinge on timing the market just right to get a good price. Smaller, regular amounts take way the guesswork of when and how much to invest.

Stay Focused on Your Future

Investment success often depends more on investor choices than on market performance. Appropriate investments that suit your needs and a long-term commitment—particularly with regular contributions—can help you stay on track.

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The opinions expressed are those of American Century Investments (or the portfolio manager) and are no guarantee of the future performance of any American Century Investments' portfolio. This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.