Now that spring is here, you may find it easier to get outside to run, bike or take part in other physical pursuits that you enjoy. As you know, the more active you are, the more efficiently your body will work. And the same can hold true for your investments: The more exercise they get, the more potential they have to work on your behalf.
Just how do investments get exercise? Through lots of activity. And you can keep your investments active in at least two ways: through systematic investing and dividend reinvestment. Let’s take a look at both these techniques.
When you engage in systematic investing, commonly called dollar cost averaging, you continually are putting your money in motion. Essentially, you put the same amount of money into the same investments at regular intervals. For example, you might decide to invest $100 per month in Company ABC stock. To impose this investment discipline on yourself, you even could have the money sent directly from your checking or savings account.
Of course, since the price of ABC stock, like those of all stocks, constantly is changing, your $100 investment most likely will buy different numbers of shares each month. This can work to your advantage, because when the stock price of ABC goes down, your $100 will buy more shares. When the price goes up, you’ll automatically be a smart enough shopper to buy fewer shares, just as you’d typically buy less of something when its price goes up.
Over time, systematic investing typically results in a lower average cost per share than if you were to make sporadic lump-sum investments. If you can lower the cost of investing, this may help boost your investment returns. This also can be an effective way to fund your retirement accounts each year. (Keep in mind, though, that systematic investing does not guarantee a profit or protect against loss. Also, you’ll need the financial resources available to keep investing through up-and-down markets.)
Dividend reinvestment is similar to systematic investing in that it allows you to build more shares of an investment. But when you reinvest dividends, you don’t even have to take money from other sources to increase your shares — you simply request that a stock or a mutual fund, instead of paying you a dividend in cash, reinvest the dividend into that same stock or mutual fund. It’s an effortless way of adding shares.
Similar to dollar cost averaging, dividend reinvestment imposes investment discipline — you automatically keep putting money in the market during up and down periods. (Don’t forget, though, that dividends can be increased, decreased or eliminated at any point without notice.)
Exercising your investment dollars in these ways can help you go a long way toward keeping your portfolio in good shape — enabling you to make healthy progress toward your important long-term goals.
Cardella is a financial advisor with Edward Jones in Hinesville.