Escape Market Timing and Emotional Investing Automatically
Want to say goodbye to bad investing habits and all the emotions? Our financial consultants give their top three reasons why automatic investing may help.
Investors may be unaware of bad habits, such as market timing, emotional decisions and not investing regularly.
Market timing, emotional investing and not paying yourself first may be detrimental to long-term goals.
Our financial consultants give their top three ways automatic investing can help you practice good financial habits.
June typically kicks off vacation season. But don’t take a break from good investing habits. After months of not-so-great market news, wanting to escape the headlines makes sense.
Financial consultants Amy Alley, Chris Goodwin, Rowland Pepito and Jennifer Simmons address a practical strategy to give you a breather: automatic investing. Here are their top three reasons to consider it.
1. Trade Market Timing for Time in the Market
“While many investors have heard the term ‘market timing,’ many are actually still unaware of what it consists of,” says Jennifer.
Timing the market is trying to predict the best time to invest based on what you think markets will do. This financial behavior can include adjusting your portfolio in anticipation of market news, moving in and out of cash equivalents, such as money markets, due to uncertainty and/or stopping investments during a market decline. She adds, “These actions can have a devastating impact on your portfolio’s performance over time.”
Am I a Market Timer?
“Some people try to convince themselves they aren’t market timers,” says Jennifer. “But no matter what you call trying to decide the best time to invest at the right price, it’s market timing.”
“When I see a pattern of jumping in and out of the markets, I suggest automatic investing,” says Rowland. “It’s a way to focus on what you can control: when you get into an investment and when you get out. It also helps you take advantage of dollar-cost averaging.”
Won’t I Lose Control With Automatic Investing?
“You are still in charge of the money that’s regularly going into the markets,” Chris says. “All you’ve done is remove the guesswork and made it easier for yourself.”
Still, the financial consultants recognize that clients aren’t always convinced market timing doesn’t work, and for some, it’s about wanting control. That may be because they’ve heard about that “one person” for whom timing the market seemed to work.
“I’ve had clients tell me about that person and that ‘one trade’ when timing the market paid off,” says Amy. “But then I ask if there were other winning days. The answer is generally no.”
An option for these clients may be an “exploratory account.” This account lets you invest in other things without touching your core investments or nest egg. “For well-funded investors, this can be a way to invest in new trends without worrying how it will affect the future,” says Amy.
Chris cautions: “This is only for those who can afford to lose the money without it affecting their financial security. The two accounts must be separate, and you must be aware that you might blow it. It’s not for everyone.”
2. Say Bon Voyage to Emotional Investing
All four financial consultants agree a big advantage of automatic investing is it takes the emotions out of your investment decisions. And that may be critical for your success.
“Consistent automatic investing takes the psychology out of when to invest,” Amy says. “That’s so important when all you hear is bad financial news. Automatic investing helps you not overthink your decisions.”
Jennifer agrees: “Studies on behavioral finance have provided significant evidence on the role emotions have on money decisions. A pre-commitment strategy like setting up automatic investments can help you stay on course.”
And it doesn’t matter how much money you have or how savvy you are. “I’ve had hedge fund managers and large institutional clients—who knew far more than me—invest their annual bonuses automatically,“ relays Rowland. “Those clients were self-aware enough to know they could not emotionally detach from managing their own money.”
Should I Stop When Markets Drop?
Emotions can go both ways with investing. Often, investors want to purchase when an investment is on the rise and find it more challenging to keep investing when markets fall.
Chris explains: “The stock market can seem like a big black box that doesn’t always make sense. People don’t tend to think of investing as buying into companies within their portfolio, possibly their local electric company, grocery store or cell phone provider. Thinking along those lines generally doesn’t conjure up the same concerns as ‘the stock market’ and can boost confidence to continue investing in down markets when prices are more attractive.”
“I liken it to buying widgets,” says Rowland. “If I can buy the same widget today for $9 that was $10 yesterday, I’d consider it a bargain. But when it comes to stocks, we have no problem paying a higher and higher price.”
Is the price lower because something fundamentally changed to impact the long-term growth of the investment? If not, a key to automatic investing is to be disciplined and take advantage of times the market offers you a deal.
Not only does automatic investing help you take advantage of market swings, but it also helps you avoid emotional decisions that come with those fluctuations. Amy agrees, “If you have a longer time horizon and are investing automatically when the markets drop, this may be good news. It's what we've been waiting for!”
3. Pay Yourself (and Your Future) First
If you’ve been investing for a while, you’ve likely heard about paying yourself first. It’s making your future a priority (and investing for it). For parents and grandparents, sharing wisdom about starting early—even with small amounts—could be one of the best life lessons you pass on, especially to new graduates.
Whether through a 401(k) or on their own, career starters could benefit from automatic investing.
What if I Don’t Have Enough Money?
You may have the money and not realize it. “Sometimes the hesitation is actually a budgeting issue,” says Chris. “Automatic investing can help you make a good start with small amounts.”
Jennifer agrees, “Automatic investing can help people stick with a budget, and a budget is good for helping people find money to invest.”
Rowland adds: “This saying communicates it well: Many successful investors will automate their investing so that whatever is left at the end of the month is invested. Many very successful investors invest a specific dollar amount every month and figures out how to live off the rest.”*
Automatic or Lump Sum?
Statistically, lump sum investments have performed better, but the trade-off may be the benefit of discipline. And it depends on your circumstances.
“If you’ve inherited a large amount, you may want to invest it all at once,” says Rowland. “But I also ask people if they invest $100,000 and the market drops 20%, what will you do if you lose $20,000? If your tendency is to stop investing, you may want to consider investing over time automatically.”
On the other hand, Amy says: “If you have the amount equal to an IRA contribution limit, there’s nothing wrong with investing the whole thing. For those who want to contribute the max and don’t have it, an automatic investment can help you get there over 12 months.”
Jennifer adds, “Plus, automatic investing is convenient. I encourage those starting out or in the retirement savings years to consider putting as much of their financial life on a systematic plan as possible. Of course, you can always make changes, but making this part easier may help you keep it up.”
Rowland says, “Auto investing may also be good for those ready to get back in the markets. Or for those who may need to exchange from a concentrated stock position into a more diversified portfolio as they get closer to retirement.”
Automatic Investing: Can It Benefit You?
No matter your age, investing knowledge or financial status, automatic investing may help you take the emotions out of investing. And it can help keep you from straying from your plan if you’re tempted to time the markets.
“An advisor I interned with in the 90s—who’d been practicing over 20 years by then—would tell his clients: ‘I’m trying to keep you from making bad decisions,” says Rowland. “I think automatic investing serves that purpose too.”
“And it can help those starting out dip their toes into investing,” says Jennifer. “People may be surprised at how small amounts can add up over time if they invest regularly and stick with it.”
Investor Top 3 Reasons
We think automatic investing is a great way to practice the long-held principle of regular investing—no matter what the markets do. Whether you should or shouldn’t depends on your finances, timeline and goals. A good place to start is to ask a professional. Our team is here to help.
Investor Top 3 Conversations
Our job is to help clients navigate current events and understand how they may impact their investments. We want to share the most pressing conversations, presented in our Investor Top 3. Watch for the next edition coming soon.
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.
Dollar cost averaging does not ensure a profit or protect against a loss in declining markets. This investment strategy involves continuous investment in securities, regardless of fluctuating price levels. An investor should consider his or her financial ability to continue purchases in periods of low or fluctuating price levels.
Investment return and principal value of security investments will fluctuate. The value at the time of redemption may be more or less than the original cost. Past performance is no guarantee of future results.
Diversification does not assure a profit nor does it protect against loss of principal.