{"id":3553,"date":"2021-06-14T19:00:00","date_gmt":"2021-06-15T00:00:00","guid":{"rendered":"https:\/\/www.rbcwealthmanagement.com\/en-ca\/insights\/setting-a-strategy-for-investing-regularly\/"},"modified":"2024-07-30T15:51:44","modified_gmt":"2024-07-30T19:51:44","slug":"setting-a-strategy-for-investing-regularly","status":"publish","type":"post","link":"https:\/\/www.rbcwealthmanagement.com\/en-ca\/insights\/setting-a-strategy-for-investing-regularly","title":{"rendered":"Setting a strategy for investing regularly"},"content":{"rendered":"\n

Whether you\u2019re a seasoned investor or you\u2019re 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.<\/p>\n\n\n\n

Regular investing: What it is and how it works<\/h4>\n\n\n\n

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 \u201cdollar-cost averaging\u201d (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\u2019re someone who\u2019s 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\u2019re still building that consistency within your investment plan.<\/p>\n\n\n\n

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. \u201cWhen you have a structured plan to invest regularly, this helps ensure your investing remains a priority at all times \u2014 not just when it\u2019s RRSP season or if a sudden windfall comes your way, for example,\u201d shares Krystyne Manzer, CFA, Vice President, Portfolio Specialist, RBC Global Asset Management. \u201cIt can be a great way to establish discipline around savings and paying yourself first, helping to build wealth over the long-term.\u201d<\/p>\n\n\n\n

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, \u201cConsistently contributing to a portfolio is a way of easing into the markets, regardless of whether they\u2019re 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.\u201d<\/p>\n\n\n\n

Addressing emotional impacts in investing<\/h4>\n\n\n\n

There\u2019s 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.<\/p>\n\n\n\n

\u201cFrom 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,\u201d shares Manzer. \u201cIn 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.\u201d<\/p>\n\n\n\n

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, \u201cThis 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\u2019re expecting this same path of returns to continue.\u201d 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<\/sup><\/p>\n\n\n\n

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 \u2014 regardless of what the most recent experience has looked like. \u201cAgain, 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,\u201d Manzer reinforces.<\/p>\n\n\n\n

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Regular investing in action<\/h4>\n\n\n\n

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.) \u201cAs 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,\u201d Manzer explains. \u201cWhile 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.\u201d 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.<\/p>\n\n\n\n

\u201cAs this example illustrates, even when the market backdrop is unfavourable, regular investing helped protect the investor\u2019s portfolio through the decline and ensured they were properly positioned to benefit from the subsequent recovery,\u201d explains Manzer. \u201cRegular investing takes away the urge to make one perfect investment and turns it into a strategy about making consistently good investments.\u201d<\/p>\n\n\n\n

Figure 1 – Getting back on track in uncertain times<\/h5>\n\n\n\n
DCA vs. perfect market timing
Growth of $100,000<\/h6>\n\n\n\n