"Slow and steady wins the race."
You may have learned that phrase long ago from the fable, "The Tortoise and the Hare." It’s certainly an apt phrase for investors.
SMI’s executive editor Mark Biller (pictured) discussed the "steady" approach this week with host Rob West on Moody Radio’s MoneyWise Live.
To listen, click the play button below. Scroll down for the transcript.
(And for more radio appearances by members of the SMI team, visit our Resources page.)
MoneyWise Live airs daily at 4:00 p.m. ET/3:00 CT.
Transcript
Rob West:
We used to call an exclusive dating relationship "going steady." That’s still a good way to describe another serious and sustained commitment: making regular investments. I’ll talk about that first today with investing expert, Mark Biller. Then it’s onto your calls at 800-525-7000. This is MoneyWise Live — biblical wisdom for your financial decisions. (theme music ends)
Well, our friend and fellow Christ-follower, Mark Biller is executive editor at Sound Mind Investing — and, Mark, as always, great to have you back on the program.
Mark Biller:
Hey Rob! Thanks for having me back.
Rob West:
Well, Mark, we’ve recently talked about investing as a "day at the beach." Another time recently, we said it was like a "tennis lesson." Now, it’s like "going steady."
Rob West:
How in the world do we make this analogy? And do we need a chaperone?
Mark Biller:
We probably do. Maybe we should call Steve Moore back out of retirement to oversee this. I’m sure he’d have some fun with this stuff.
Rob West:
He would absolutely have fun with it.
Mark Biller:
Yeah. So, you know, obviously Rob, we’re trying to create some, some good "memory hooks" to hang some of this material on — and this "going steady" approach that we’re talking about today really refers to automating your investing by having a predetermined amount of money regularly transferred from your bank account into an investment account.
When you invest the same amount of money at these regular intervals — we often refer to that as dollar-cost averaging. A lot of people have probably heard that term. And that is one of the main virtues of workplace retirement plans like your 401(k) or 403(b). But it’s also important to note that you can set up your own automated investing plan, even if you don’t have a workplace retirement plan to participate in.
Rob West:
As we say often, dollar-cost averaging is one of our favorite investment topics because it just works. You contribute the same amount, each paycheck to your retirement account. When the market’s up, you buy fewer shares, when it’s down, you buy more shares — and it always pays off in the long run. But Mark, I’d love for you to break that down a bit. What are the distinct advantages of automating your investing in this way?
Mark Biller:
Well, in the article that we’re discussing today, Rob, we point out six specific advantages — and we can run through those real quickly. The first of those is self-discipline, you know, when you’re automating a dollar-cost averaging plan, it causes you to factor in your long-term investing into your budget right upfront. Too often, people leave their investing as kind of an afterthought — kind of whatever’s left over, which for most people, of course, is nothing when they’re done with their budgeting process. They use it all up. But this way you’re setting aside these regular installment payments towards your future financial security right upfront and building that right into your budget.
Rob West:
Yeah, And if you set it up for automatic contributions to, let’s say, your retirement account, you never have to think about it again — which is really just one of the beautiful aspects of this approach.
Mark Biller:
Yeah, and you’re really hitting the nail right on the head giving me a perfect lead-in — because the next advantage that we talk about is that automated investing eliminates the need to ask the question, you know, is this a good time to buy stocks, or should I hold off? You know, that question —which we should point out you never know the answer to that until much later; only in hindsight, do you know is now a "good time" to buy stocks — that’s a huge barrier for people making new investments. So this going steady idea by automating your investing assures that you’re going to keep making these new investments consistently, even when the market is falling.
Rob West:
Yeah, and we might say, especially when the market is falling, right?
Mark Biller:
That’s exactly it. That’s the next advantage of dollar-cost averaging, which is you get more for your money. When fund prices are low, your monthly investment stretches further, you get more shares for your money. The strategy also works the other way. When prices are high, you buy fewer shares.
So while this doesn’t protect you from losses, dollar-cost averaging will push down the average cost of your shares over time.
Rob West:
All right. What’s next?
Mark Biller:
The next one, Rob, is simply efficiency. You know, assuming that you’re using mutual funds, which allow you to purchase fractional fund shares, that means that every cent of your systematic investments gets put to work right away. That’s because traditional funds are sold in fractional shares. So, to give you an example, if you have a $200 monthly investment, that might buy 7.4928 shares of your desired mutual fund — the point simply being that the full amount gets put to work right away.
The contrast there with exchange-traded funds or stocks. And the advantage that traditional funds have is that with stocks and ETFs, or exchange-traded funds, those have to be purchased in full share amounts, at least for now. Now, that’s changing a little bit, and it could be that within a few years, all of these types we’ll be able to buy fractional shares. But for now, traditional mutual funds are a little bit better for this type of automated investing.
And as a side note, that’s also why 401(k) plans have always focused on traditional funds and have traditionally excluded ETFs.
Rob West:
Interesting. All right. Well, those are some of the real tangible advantages to dollar-cost averaging. What about some of the less tangible advantages?
Mark Biller:
You know, here you’ve got to start with peace of mind, ’cause that’s just a huge piece of this. You know, when you’re making small monthly investments, it’s just way easier for people emotionally than putting a lot of money to work — and at risk — all at once. You know, if the market falls after you’ve made a particular monthly purchase, most people can just take that in stride, knowing that if the market continues to turn down, they’ll be able to buy even more shares the following month. And on the flip side, if the market rises right after you’ve made a monthly purchase, you feel really good about your immediate profit. So the emotional swings with this approach are just way less severe than when you’re trying to pick particular moments and add big batches of money all at once.
Rob West:
Yeah, and you can obviously only do that if you’re systematic with your investment plan — or as we’re saying "going steady."
All right, Mark, what’s the last advantage?
Mark Biller:
It’s really the ease of getting started. You know, with most brokerage firms and fund companies, you can open an investment account with a relatively small amount of money or even no upfront money at all. And beyond that most mutual funds allow for very small monthly transfers. So this is really an easy way to get started investing, even if you don’t have a lot of money already saved up. Yeah.
Rob West:
We get calls all the time, Mark, from folks wanting to know where to begin, how to get started. Break that down for us. What are the nuts and bolts of setting up a plan like you’re describing?
Mark Biller:
Absolutely. We get a lot of those questions too. And the easiest way to do this, Rob, is if your employer has a retirement plan, like a 401(k) or a 403(b), for you to participate through. In addition, you also might get some matching contributions if you go that route. So I’d definitely check with your employer first.
But if your employer doesn’t offer you an automated plan, then the next best choice for most people is going to be to set up an IRA with a broker or a mutual fund company. We list a handful of good ones that we like in the article that we’ve been discussing — if listeners need some ideas about where to go for that for setting up an account. And then it’s just a matter of setting up these automatic transfers from your bank. And you can usually do that on a particular form from whatever broker or mutual fund company you set up your new account with.
Now, if you already have an account with somebody, just ask that company for their automatic investing form — or a lot of times you can just poke around their website and find that form on your own.
And I would just add one final note regarding the timing of all this. Whatever options you choose for implementing the systematic investing plan, you really want to get started as soon as you can, so that you get the power of compounding working for you as long as possible. You know, someday, you’re going to look back on these humble beginnings — and we all start with humble beginnings — and remember when you started going steady and you’ll just be amazed at how, how that account size has grown over time.
Rob West:
Yeah. Very good. Mark, is this something SMI could help with as well?
Mark Biller:
Oh, absolutely. And I’d encourage you to take a look at this article. Again, we’ve got a list — there’s a table in the article that lists several different options for setting this up. And, you know, our different strategies that we follow in Sound Mind investing can be applied in this way, but even if you’re not using our strategies, just getting that money flow going into a good mutual fund of some type.
You know, the thing that really surprises people is once you put this on autopilot, you’re not thinking about it every month. So it tends to sneak up on people when they look six months, 12 months, a few years down the road and go, "Wow! That really has built up quite a bit while I haven’t even really been paying attention." And that’s the whole idea of this is to make it the type of thing where you don’t have to pay regular, consistent attention. It’s just happening automatically in the background of your life.
Rob West:
Mark as you know, there’s been a huge boom in the FinTech space, financial technology, with apps like Acorns and others that are really geared toward Millennials to help them do just what you’re describing — whether that’s in the saving area for short-term needs or longer term with systematic retirement plan contributions. Do you like those, or do they tend to be a bit more expensive than what we might find in your article?
Mark Biller:
You know, there’s a lot of variation so it’s hard to paint with a broad brush. I think that the point you just brought up is an important one. Whatever you’re looking at, whatever plan or app or system, you want to look and see, "What are the expenses? What am I paying for this?" The way that we’re doing it, through the article that we’re talking about, those transaction fees are very, very small, if not zero, because a lot of these are no-transaction-fee funds. So it’s a very cheap way to do it.
That’s not to say these others are bad. You just want to be careful. The other thing I’d be a little bit careful of is that a lot of times these apps are geared towards getting you into individual stocks as opposed to diversified mutual funds. And so you can run into a lot more volatility when you’re just picking one stock or a handful of stocks versus a diversified fund that’s going to be a little bit smoother ride.
Rob West:
Well, this has been really helpful, Mark. I love the power of compounding that comes in when we invest systematically over the long haul. Thanks for stopping by.
Mark Biller:
Always my pleasure, Rob.
Rob West:
Mark Biller has been our guest today. You can read more about this in their monthly newsletter at soundmindinvesting.org. The article is titled, Going Steady: The Advantages of a Systematic Investment Plan.
