Submitted by Chris Nelner
(Edward Jones) – The New Year is a perfect time to get a head start on setting personal goals and to take part in physical activities you enjoy. The more active you are, the more efficiently your body will work.
This conventional wisdom can hold true for your investments: The more “exercise” they get, the more potential they have to work on your behalf.
Just how can your investments get more exercise? Through lots of activity in at least two ways: systematic investing and dividend reinvestment.
When you participate in systematic investing (also known as dollar cost averaging), you’re continually putting your money “in motion.” In other words, you put the same amount of money into the same investments at regular intervals. For example, you invest $100 per month in Company ABC stock. You could even have the set amount sent directly from your chequing or savings account.
Of course, as the price of ABC stock, like those of all stocks, is constantly changing, your $100 investment will most likely buy different numbers of shares each month. This can work to your advantage, because when ABC stock price goes down, your $100 will buy more shares. When the price goes up, you’ll automatically 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 your investing costs, this may help boost your investment returns. This also can be an effective way to fund your retirement account(s) each year. (Keep in mind that systematic investing doesn’t guarantee a profit or protect against loss. You’ll also need the financial resources available to keep investing through up and down markets.)
Dividend reinvestment is similar to systematic investing in that it lets you 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. Instead you can simply request that the cash dividend be reinvested into more shares of the same stock or mutual fund. It’s an effortless way of adding shares. Similar to systematic investing, dividend reinvestment imposes investment discipline — you automatically keep putting money in the market during up and down periods. (Don’t forget that dividends can be increased, decreased or eliminated without notice.)
Exercising your investment dollars in these ways can help you keep your portfolio in good shape, which can enable you to make healthy progress toward your long-term financial goals.
Chris Nelner, CFP is a Financial Advisor at Edward Jones in Calgary. For information contact firstname.lastname@example.org.