Now that 2016 is behind us, it’s time to think about which financial resolutions might benefit you the most in 2017.
I’ve said this before, but I’m going to say it again because it’s so important. The most important thing you can do for your portfolio as a long-term investor is to automate your investment process through a systematic investment plan. This is especially important for younger investors who have time on their side. Let’s take a closer look at the systematic investment plan and why it can be of such great benefit to you.
A systematic investment plan (SIP) is nothing more than investing a small amount of money on a pre-set date every month into a specific mutual fund or funds. A systematic investment plan works best with a mutual fund or funds that have higher volatility. Thus, it tends to work better with stock funds than it does with bond funds, since stock funds tend to be more volatile than bond funds.
Let’s say for example that you are investing $500 per month and the value of the stock mutual fund during the month of your 1st investment was $20 per share. In that 1st month he would’ve purchased 25 shares. Let’s assume during the following four months that the mutual fund share price went to $10, then $13, then $20 and finally $25 per share. By investing $500 per month into each of these five months, you would have purchased 158.5 shares. This compares with investing the entire $2,500 upfront at $20 per share in which case you would have purchased 125 shares.
The only time a systematic investment plan would work to your disadvantage is if the stock market did nothing but rise steadily during your investment. You wouldn’t be unhappy, but you would have been better off investing all the money up front. However, in real life, the market going straight up rarely happens.
I believe the real secret to the systematic investment plan is setting it up to happen automatically without you having to make a decision each month whether or not it’s a good time to invest. Setting up such a systematic investment plan is easy to establish between a mutual fund company and your checking or money market account at your bank.
The secret here is to take the human emotions out of the investment process. A study by the financial institution, Blackrock, showed that between 1966 and 2015, the S&P 500 index (an unmanaged index of large-cap stocks) had an average annual return of 8.19%. During that same time frame, the average investor earned 2.11%.
So while the secret to successful investing is buying low and selling high, human emotions tend to lead us to do just the opposite. We want to buy investments when we’re happy about the market (a higher market) and we want to sell when we’re unhappy with the market (a lower market). If you follow a systematic investment plan, you can take this human emotion out of the equation, and that will tend to work in your favor over the long term.
So my number one financial resolution recommendation for 2017 is to establish a systematic investment plan for yourself and stick with it. You always have the flexibility of increasing or decreasing your monthly investment or suspending the plan if circumstances require it. Your financial advisor can help you implement your systematic investment plan and the best time to start the plan is now. - Journal Online
