One of the advantages associated with long-term investing is the potential for compounding. Here’s how it works:
When your investments produce earnings, those earnings get reinvested and can earn even more. The more time your money stays invested, the greater the opportunity for compounding and growth. Keep in mind that while compounding, overall, can have a significant long-term impact, there may be periods where your money won’t grow. While there are no guarantees, the value of compounded investment earnings can turn out to be far greater over the long-term than your contributions alone.
By starting to save early you can benefit greater from the power of compounding, whereby the earnings of your account earn additional earnings. Over the course of decades, this can make a significant difference in your assets.
Trying to time the markets is never a good idea. Investors are often spooked by a stock market downturn and flee the market. This can lock in losses and prevent investors from reaping the rewards when the market rebounds. Keeping emotion in check during fast moving or volatile markets can be beneficial in the long run. This is also an indicator of personal risk tolerance as the desire to flee may mean that the risk of the investment is to great.
No one has figured out the best time to invest. Investing and staying invested so as not to miss the best days of the market over a given period will enhance the potential of greater returns. You can take the guesswork out of it by making a regular fixed-dollar investment, for example, every month or every paycheck. This is called dollar cost averaging. If you’re contributing to your retirement plan, you’re probably already using this strategy.
Because the prices of securities such as mutual funds fluctuate, dollar cost averaging allows you over the long term to buy more shares when prices are lower and to buy fewer shares when prices are higher. Dollar cost averaging can lower your average cost per share of a security, but it doesn’t guarantee a profit or protect against loss. You should consider your personal risk tolerance and willingness to keep investing when share prices are declining.
Ben Bouman of Alpine Financial is a licensed Investment Adviser with Cetera Advisors, LLC member FINRA/SIPC.