Whether you’re a seasoned investor or you’re just getting started with saving and investing, making investment choices and staying on top of market news can be complicated and may sometimes feel overwhelming. In building an effective long-term investment strategy and simplifying the process overall, there are some core principles that can help, one of which is investing on a regular basis.
Regular investing: What it is and how it works
Regular investing is an approach that involves consistently contributing to your investment portfolio on a scheduled basis (for example, it could be with each paycheque or monthly), rather than investing a lump sum periodically or trying to time your investment decisions based on the market. This approach, which is also sometimes called “dollar-cost averaging” (DCA) typically takes place using a fixed-dollar amount, so equal amounts are invested at predetermined intervals. Depending on your situation and your income stream, however, it can also be set up based on a percentage amount. So if you’re someone who’s a contract worker or self-employed and your income stream is sometimes irregular, using a percentage amount may work better. This would ensure your contributions are proportionate to your income but you’re still building that consistency within your investment plan.
For any investor, some main benefits of regular investing are eliminating the guesswork of when to react or not react to market conditions, as well as establishing a comfortable balance for when and how much to invest. “When you have a structured plan to invest regularly, this helps ensure your investing remains a priority at all times — not just when it’s RRSP season or if a sudden windfall comes your way, for example,” shares Krystyne Manzer, CFA, Vice President, Portfolio Specialist, RBC Global Asset Management. “It can be a great way to establish discipline around savings and paying yourself first, helping to build wealth over the long-term.”
Having a regular cadence with your investing enables you to invest in many market conditions and may also result in a lower average cost of your investment over time. As Manzer explains, “Consistently contributing to a portfolio is a way of easing into the markets, regardless of whether they’re rising, falling or flat. And with a fixed-dollar amount being invested on a pre-set schedule, this means more shares or units can be bought when prices are low, and less when markets are higher, which over the long-term can lead to a decreased adjusted cost base.”
Addressing emotional impacts in investing
There’s also the softer side of investing to consider as well. Regardless of the type of investor you are or your risk tolerance, psychological and emotional elements can play an influential role in the investment decisions you make. These factors are natural and largely to be expected when financial well-being and long-term goals are so closely tied to your investments. At the same time, acting on behavioural impulses that arise from market ups and downs can lead to costly missteps with a portfolio. With this in mind, setting a plan for regular investing may help in avoiding the natural human inclination to try and time the market and to stay the course in periods of short-term volatility.
“From a human behaviour standpoint, while the impulse to try and time the market will always exist, a plan for investing regularly can help with keeping emotions in check when it comes to investment decisions and possible mistakes associated with acting on emotions,” shares Manzer. “In this sense, DCA strategies allow investors to contribute to their portfolios through periods of drawdowns and beyond, with greater confidence that this type of approach can smooth out returns over time and reduce overall portfolio volatility.”
With a number of studies digging into this topic more specifically, findings show that investment behaviour is often driven by emotions and behavioural biases. For example, recency bias, which is a cognitive or memory bias that places greater importance on events that took place recently, suggests that investors place more emphasis on near-term experiences than they do on historical events. As Manzer notes, “This means that during a period of uncertainty, for example, investors may think that volatility is likely to persist well into the future, even in the face of evidence to the contrary. Alternately, during a period of strength where valuations may be slightly stretched, investors may be inclined to continue investing, as they’re expecting this same path of returns to continue.” In fact, according to findings from one study, when investors put too much emphasis on the current environment and attempted to predict the future based on current conditions, they underperformed the rational group by 7 percent per year over the long-run.1
With these types of factors at play for investors, the structure of regular investing is effective for curbing bias and emotions in the process, as assets are consistently put to work — regardless of what the most recent experience has looked like. “Again, using a disciplined approach helps eliminate that often stressful decision-making that comes with attempting to time an investment, and as such, some of the unconscious bias that contributes to that decision,” Manzer reinforces.
Regular investing in action
To better understand the potential benefits of a regular investing strategy, a good example to look at is the period of time encompassing the 2008 financial crisis. (See Figure 1.) “As is shown in the graph, an investor who set up a regular monthly investment plan, or a DCA strategy, in September 2008 would have continued investing every month through the crisis,” Manzer explains. “While it might have felt uncomfortable at times, over the long-term, that investor would have experienced a healthy return on their investment. Someone with perfect foresight who invested exactly at the market bottom would have experienced slightly higher returns, as the graph indicates, but achieving this perfect timing would have been both incredibly difficult and very unnerving.” And finally, as shown in Figure 1, an investor who delayed making their investment until after the end of the crisis (when there were firm signs of an improving economic backdrop and a decline in the unemployment rate) would have missed out on the subsequent rebound.
“As this example illustrates, even when the market backdrop is unfavourable, regular investing helped protect the investor’s portfolio through the decline and ensured they were properly positioned to benefit from the subsequent recovery,” explains Manzer. “Regular investing takes away the urge to make one perfect investment and turns it into a strategy about making consistently good investments.”
Figure 1 - Getting back on track in uncertain times
DCA vs. perfect market timing
Growth of $100,000
Source: RBC GAM, Morningstar. RBC Select Balanced Portfolio Series F data as of December 31, 2020. Scenario involves an investor with $100,000 in cash. The DCA strategy deploys the cash across six equal monthly installments beginning September 1, 2008. The lump-sum investment involves deploying cash on specified dates. *December 4, 2009 is date the November U.S. non-farm payroll report was issued, showing first decline in unemployment rate during global financial crisis.
How savings can add up
Going back to the overall concept of investing, the basic process involves setting shorter-term and longer-term goals, identifying risk tolerance and making decisions based on those factors to ultimately generate gains. “I think it’s important to remember that it’s often savings that fund one’s eventual investments, as many have the mindset that investments are something you delay until you’ve saved ‘enough’ money,” shares Manzer. “However, putting your investments off can be costly. The longer you wait, the more you’ll need to contribute to allow your portfolio to compound over time. If you apply the principles of investing early and investing regularly, this helps to set the stage for staying on track to save more over time. There’s also a greater level of protection and peace of mind through periods of changing market conditions.
Another important aspect to consider is interest rates. As Manzer notes, “In times when interest rates are very low, investors are no longer earning enough of a return on their cash to exceed their cost of living. Those who need the short-term liquidity provided by cash don’t need to be concerned about this as much. However, those with longer-term goals may be better suited to invest their savings, as it provides a better opportunity to outpace inflation and grow their portfolio.” (See Figure 2.)
Figure 2 – Considerations for investors that prefer the stability of cash
Income generated by cash vs. inflation
Based on $100,000
Source: RBC GAM, Morningstar, Bank of Canada. January 1993 to *October 31, 2020. Cash represented by Government of Canada 91-Day T-bill, inflation calculated by the Bank of Canada CPI-median measure of core inflation.
Finding peace of mind in structure
One of the keys that Manzer encourages is finding ways to make investing a comfortable experience, and an analogy she often uses is looking at your investments the same way you do the value of your home. “Investing in a home is quite similar to investing — regular mortgage payments mean that the principal balance is continually paid down and your equity grows in kind. The one major difference between investing in the financial markets and in real estate connects back to the psychology of the investment — the ability, or lack thereof, to see the value change on a day-to-day basis,” she explains.
In other words, financial markets feel more volatile than real estate, largely because their value is readily available daily. For real estate, until a house is actually sold, real estate investors don’t know the true return of their purchase. In this way, it becomes easier to tune out the day-to-day volatility. On the flipside, for financial markets, the real-time adjustments can make investors more attuned to the noise. “Taking action on that noise can often end up being detrimental to achieving long-term goals, so it’s here that tools and tried-and-true principles such as regular investing can help you stay on track.”
“Ultimately, the key is maintaining perspective, and regular investing can play an important role in that,” Manzer notes. “Day-to-day fluctuations are likely to have little impact on your long-term objectives or the strategies designed to get you there.”
- Algorithmic Finance 1. “Behavioral biases and investor performance.” Todd Feldman. 2011. IOS Press. Accessed February 2021. https://content.iospress.com/download/algorithmic-finance/af005?id=algorithmic-finance%2Faf005.
RBC Global Asset Management Inc., RBC Dominion Securities Inc.* and Royal Bank of Canada are separate corporate entities which are affiliated. *Member – Canadian Investor Protection Fund. RBC Dominion Securities Inc. is a member company of RBC Wealth Management, a business segment of Royal Bank of Canada. RBC Funds, BlueBay Funds and PH&N Funds are offered by RBC Global Asset Management Inc. and distributed through authorized dealers in Canada.