The stock market goes up and down like ocean waves. It is impossible to predict the movements of the stock market. How often do we make mistakes in the market by buying higher and selling lower? GREED can drive us to impulsively jump on a stock that appears to be rising and FEAR can overtake us and cause use to sell quickly because everyone is selling their shares. GREED and FEAR are our worst enemies and often causes us to act irrationally and make the wrong decisions.
One way to eliminate these emotions is by automatic investing, or emotionless investing. That’s right, we have to admit our emotions are the cause of our mistakes. And to eliminate the mistakes is to eliminate our emotions. We can fight our emotions by setting up a systematic way of investing.
The key is to invest a set amount at a set time interval. That is, put away an x amount of dollars every z period of time. This automatic investing allows you to take advantage of down markets where you can buy more shares of the market at a lower price.
For example, XYZ company is currently worth $10. If you invest $500 now, you will buy 50 shares of XYZ. Assume XYZ goes down to $5 next month. You invest another $500 on the next month, the same amount of money you did on the first month, but on the second month you would be able to purchase 100 shares. And assume, on the third month, XYZ becomes $20, you would only buy 25 shares on the third month. Over time, as stocks generally trend upwards, you will be buying more shares on the dip and end up with more shares than you normally would if you had not set up an automatic investing system. Just make sure that you’re tracking all of this in some sort of home inventory and business finance package.
The automatic investing system is very simple to set up and will be working behind the scenes until you put a stop to it. Say, you earn $5,000 a month. You can decide to put away 10%, or $500 of your monthly gross income for 401k investment every month. A lot of employers allow you set this event up to be recurring. It is simple, just set it and forget it. This leaves you time and energy to focus on other things. The money is transferred to your retirement funds every month behind the scenes and working for you. Over time this $500 a month will add up. Compound it with the average 10% market returns over the long term, you will soon build yourself a very nice nest egg.
This type of event works for non-retirement accounts as well. You can set up recurring deposits with your investment firm. Say, you want to put money away in an index fund with Fidelity every 2 weeks. You can set up an account in Fidelity and have your money transfer to Fidelity every 2 weeks from your bank account automatically.
The automatic investing system saves time and saves you from worries. There’s no more worrying about whether the stock has hit its low. If the stock dips, you simply buy more shares. The truth is nobody knows what will happen in the market. By putting away a set amount of money at a set time interval, you eliminate the factor of emotions and simultaneously apply discipline to your long term investing strategy. In the long run, regardless of how wild the market has gone through, the automatic system will surely make your ride in the market a smooth one.