Building Wealth through Systematic Investing
December 20, 2019
Make no mistake about it, building wealth is the primary goal. Clients tend to focus on accumulating pools of money each for a specific purpose when in reality it is all about building wealth by growing overall net worth. It is important for investors to use a variety of account types in an effort to better prepare for life events whether it be a blessing or a storm. An efficient financial structure includes an emergency fund which normally is a savings account, an operating fund which is normally in a checking account, and a retirement account which is normally a workplace retirement account like a 401(k). To optimize savings for retirement, many often include either a traditional IRA or a ROTH IRA. I find that many people stop at this point of optimization; however, there is one very important piece missing. In an effort to truly optimize, one should consider having a separate non-qualified investment account that uses the principles of systematic investing. The major advantage of this type of account is liquidity of funds should one of life’s storms blow your way. Another advantage is if you have been blessed with discretionary income it allows you to accumulate wealth in a systematic way. At the end of the day though, it simply provides flexibility.
Practicing financial discipline is not easy. We are in a society that is consumption driven; however, to create greater wealth, investors need to save regularly and invest those savings in growth-based strategies. The first point to consider in beginning a process of building wealth is “living within your means”. Simply put– your income must be more that your outflow! The positive difference between your income and your outflow is the funds that can be allocated to a systematic investing strategy. Remember, the primary goal is to build wealth which first starts with financial discipline.
Why systematic investing? Individual investors are typically concerned with two primary risks:
(1) The risk of market volatility.
(2) The risk of market timing.
These two risks can be minimized through a strategy of systematically investing. A strategy of this nature is centered on two key principles and both are critical to achieve the goal. The first principle, being disciplined to regular deposits monthly, is important. This sets up a structure to get the funds into an investment account. This also allows for compounding interest to work more efficiently for you over time. The second principle is having a cost-efficient fund strategy for diversification that is designed around a specific risk profile. It is essential to have the deposits invested immediately in the strategy through different market cycles and to keep these funds in high volume securities that are traded daily to provide liquidity when needed. It is also important to have the dividends, or interest income, reinvest into the strategy as they are paid out.
A dollar cost averaging approach aids in helping to counter large swings in market volatility. It eliminates the need for you to time your investments in the market. There is a smoothing effect that minimizes the impact of market fluctuations, therefore reducing one of the primary risks of investing in volatile markets. With this approach, an investor does not have to worry about when to invest nor how much to invest which minimizes the effects of emotional investing as well.
“While there is no one best system, there is one that works best for you. Once you choose a system, you need to stick with it.” –Warren Buffett
Managing Partner, Capital Investment Services
Financial Advisor, RJFS
Any opinions are those of Bobby Lumpkin and not necessarily those of Raymond James. This material is being provided for information purposes only. Dollar-cost averaging and systematic investing cannot guarantee a profit or protect against a loss, and you should consider your financial ability to continue purchases through periods of low-price levels. Diversification and asset allocation do not ensure a profit or protect against a loss. Every investor’s situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Dividends are not guaranteed and must be authorized by the company’s board of directors.
Capital Investment Services, LLC., and Hutchinson Traylor are not registered broker/dealers, and are independent of Raymond James Financial Services. Investment Advisory Services are offered through Raymond James Financial Services Advisors, Inc. Securities offered through Raymond James Financial Services, Inc.
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