The Importance of Consistent Contributions
Imagine you’re walking down the street when you spot an obviously inebriated fellow—maybe he’s celebrated a promotion a little too heartily—who is swerving along, chuckling to himself, and headed in your direction.
Most of us will, wisely, give this gent a wide berth. Our attitude toward the markets, unfortunately, is often the same. In volatile times, our gut tells us to steer clear. We know that pulling our money out will likely lock in losses, so we don’t make that mistake. But many of us make another mistake, by choosing not to invest any more of our money until “things stabilize.”
This is a very natural reflex. But it’s worth resisting: Sitting on the sidelines and waiting for the right moment to resume investing may well end up costing you more than you realize.
First, the most obvious point: Unless you’ve invested a huge sum in one fell swoop, you will need to make ongoing contributions in order to reach your long-term financial goals. Too often, investors who take a pause from funding their accounts end up spending their money rather than saving it.
If they don’t spend it, they may park it in cash or other safe investments that offer negligible growth—until the markets seem more promising. But studies have shown again and again that attempting to time the market is futile for most investors. It’s best to remain disciplined and continue making contributions according to a long-term plan.
Indeed, by staying the course in volatile or falling markets, you often strengthen your hand as an investor. Suppose you invest $1,000 per month in a falling stock market. As the market declines a little more each month, your money buys more and more opportunity. You’re essentially buying stocks on sale. When markets return to their starting point and climb beyond that, you’ll find that your returns are greater because “buying on sale” has amplified your gains.
Making consistent contributions in rising markets, of course, is a great idea too. In doing so, you are adding crucial capital to your savings toward your long-term goals. The investing rule of thumb is: The more money you invest, the more you can potentially earn.
Suppose that you invest a lump sum of $100,000 and leave it untouched for five years as your portfolio gains 8% a year for five years. At the end of that period (not including fees and taxes), you’ll have a respectable $146,932,81.
Now let’s say you consistently contribute $1,000 a month over those five years. In that case, your contributions—and the gains on those contributions—will push your total to a much more impressive $219,877.46.
Wise investors not only resist the urge to yank their money from the market in volatile times—they keep contributing to their accounts. So by all means, steer clear of those drunken revelers. But when it comes to investing, keep walking straight to your destination.