The Easiest Way To Invest Is Also The Smartest!

Investing money is often a difficult task for many people. There are many psychological reasons why investing creates personal challenges, many of which can be resolved through determination and discipline. While determination wavers about as often as the market corrects, it is difficult to create an environment where it remains the same throughout the entire investment period. In other words, one day an investor may be determined to save $1,000,000 over the next so many years, but find that the determination is side-tracked the following month when emergency expenses arise and distract from the original objective.

Discipline on the other hand is much easier to "program" into our minds, especially when it comes to investing. In fact, discipline can be completely forgotten when an automatic contribution plan is initiated by the investor, most likely at the the moment when that first determination is born.

More importantly, setting up an automatic contribution plan allows investors to diversify their price points. Mutual funds are the perfect place to invest this way as they allow investors to purchase partial "units" instead of whole shares or lots, meaning the amount (not the number of shares) can remain fixed. And since the price points will vary, the investor is actually doing him- or herself a favor because those prices will vary from the start of the plan to end. The following illustrates this point very well:

Suppose an investor has two options; the first is to invest $12,000 annually and the second is to invest $1,000 per month.

On day 1, suppose that investment is worth $10.00. For the investor with $12,000 to invest, this means he now owns 1,200 units. For the investor who invests $1,000, she now owns 100 units. The following month, suppose that investment drops to $7.50. The first investor still has his 1,200 units which are now only worth $9,000, while the other investor has also lost 25% but is also buying $1,000 worth of units (or 133.33 new units at $7.50 each) for a new total of 233.33 units (100 + 133.33). Suppose that the following month, the price drops even more to $5.00. The first investor will have watched his portfolio drop from $12,000 when he started to $6,000 today. The second investor has also seen a drop, but is now buying another $1,000 worth of units (200 new units) for a total of 433.33.

While the second investor has invested $3,000, the total value of her portfolio is actually 2,166.65, a loss of just 27.8% versus the first investor who has lost 50%.

In the fourth month, suppose the price recovers a little to $7.50. Again, the first investor buys another 133.33 units with their regular $1,000 contribution, bringing her total holdings to 566.66. At today's price of $7.50, her $4,000 is actually worth $4,249.95 (566.66 X 7.50) for a gain of nearly 6.25% while the first investor is still down 25% to $9,000 from the original $12,000 invested.

Clearly, investing regularly through automatic contributions provides two benefits. The first is it tackles the issue of discipline as the automatic payments will be routine after a few easy months. The second is that it allows investors to buy high, buy low, and buy everywhere in between, allowing for gains even when the initial value of the investment drops.

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Chris has more than 16 years of experience in the financial services industry. Currently the Fund Advisor for the Mutual Fund Site, Chris stresses the importance of Asset Allocation as an investment strategy.

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