When markets are turbulent, many ask if it is time to stop saving and investing. The practice of saving and investing consistently has numerous benefits.
The amount you save is not as important as getting into the habit of putting money aside on a regular basis. Automatic savings plans, which you can use to build an emergency reserve or save for a down payment, graduate school, or retirement, are a relatively painless way to save. You can set up an automatic transfer from your bank on the day you get paid, a practice known as “paying yourself first.”
Investing a fixed-dollar amount at set intervals is called dollar-cost averaging. An advantage of these automatic plans is that you invest the same dollar amount every time. When markets are weak, or asset values have fallen, the same dollar amount will allow you to buy more shares of a mutual fund or a stock than when markets are strong and investable assets have appreciated. In this example, the average cost of your investment will be lower than if you decide to buy a set number of shares periodically.
Likewise, if you have a windfall, it is prudent to invest the money in stages rather than all at once. Make a plan to put the money to work over a period of several months. Doing so will help reduce risk during volatile periods.
