You often hear about the importance of sticking to a long-term saving or investing plan. Easier said than done, perhaps, but the principle is well founded.
When savings or investments are held in place over time, the interest or return that you are earning is continually added to your initial investment. This can add a considerable boost to your savings over time. Consider this: money invested with a 5% annual return will double in value every 14 years.
When it comes to money invested in the stock market – via mutual funds or similar investments, held in a college savings plan or some other kind of investment account – it’s critical to remember that the market’s ups and downs are impossible to predict.
People who try to “time the market” – entering and exiting in an attempt to take advantage of highs and lows – always risk being out of the market on the “good days” that can really make a difference in terms of overall investment returns. That’s why it’s so important to maintain a consistent presence in the investment markets – to avoid over-reacting each time the market makes a sudden move.
If you would have tried to “time the market” and missed the best 25 days over a 20-year period ended 12/31/08, $1,000 would be worth $1,332, but if you would have stayed invested the $1,000 would now be worth $4,940.1
One of the benefits of a college savings plan that offers an automatic investing feature (see the article “Lots of Ways to Get Started”) is that the plan offers a way to take good advantage of the market’s dips as well as its upturns. The strategy of automatic investment is also known as “dollar cost averaging.”
With dollar cost averaging, you invest the same dollar amount in an investment fund on a consistent basis, despite what the market is doing. By doing this, you end up buying more shares in the investment funds when the price is low and fewer shares when the price is high. The result is that your average cost for the shares can be less than the average price of the shares, over time. However, keep in mind that dollar cost averaging does not assure a profit and does not protect against loss in declining markets.
Working with a financial advisor also can help you stay the course and avoid damaging mistakes that can hurt investment returns. One of an advisor’s most important roles – once they’ve helped you develop a formal plan – is to give you a supportive, long term perspective on the market’s movements that can help reinforce your commitment to stick to the plan even when times are tough. Our article “Need a Financial Guidance Counselor?” provides useful tips on finding and working with an advisor.