Regular investing can help you cope with the human tendency of hesitating to invest in a declining market, when stock prices may actually be more reasonable.
With a systematic investment plan, known as dollar cost averaging, a mutual fund shareholder invests the same amount at regular intervals — for example, $500 each month — regardless of whether stock prices rise or fall. Using this strategy, investors can buy more shares at lower prices and fewer shares at higher prices.
A program of regular investing can help take the emotion out of investing when markets turn particularly volatile because your long-term strategy doesn’t change. There is no need to make a drastic adjustment. In fact, often one of the worst things investors can do when the market dips is to take their money out of the market, because it often means selling low and missing the chance to add to a portfolio when prices are down.
“Automatic, regular investing also frees the individual investor from trying to forecast in the short term what the stock market will do,” says Gregg Ireland, a veteran portfolio manager for several American Funds. “Speculating what the stock market will do in the short term is like predicting the weather next week. It’s an unpredictable variable,” he says.