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Subscription services seem to be the sweet spot for attracting new users and building customer loyalty. For $10 a month? Take all the streaming music you want. Another $20 per month? Here’s access to a library of workout videos. Why should your mindset be any different when it comes to investment contributions?
After all, some of the same tenets that make subscription services so appealing to consumers can be mirrored by an automatic investment strategy. Barb Renner, vice chairman and U.S. consumer products leader at Deloitte, says that the most successful subscription services are those that meet a fundamental need, can be customized and are offered in the most convenient way possible.
“You’re happy it’s there, because it’s easy. And it’s paid, and it shows up, and you never have to worry about it,” Renner says of the best subscription offerings.
Imagine viewing retirement savings in the same light: Customize the subscription now, set it and forget it. Then when you need it later, it’s right there waiting for you.
To be clear, this type of investing isn’t new. Dollar-cost averaging, as it is known, entails making regular contributions to your investment account on a fixed schedule, and has proven to be an effective way to build savings over time while reducing the impact of volatility. If you participate in a 401(k) or other workplace retirement plan, you’re likely already doing this.
“This approach has several benefits,” says Mark Clure, a certified financial planner and principal at Enso Wealth Management in Mount Shasta, California. “It offers the same convenience as a subscription service. Once established, it happens automatically and requires no additional action on the part of the investor.”
The benefits of an ‘investment subscription’
Seeing investing as a subscription can take the emotion (read: stress) out of investing, which has several knock-on effects.
When you contribute a set amount on a fixed schedule, you’ll inevitably buy into the market at different prices. Sure, that means you might buy when prices are high, but it also means you’ll snag deals when prices fall. Over time, this smoothes out your average cost without any work on your part. In other words, no more worrying about buying in at the wrong time.
There are other upsides, but to Clure, the biggest benefit of this “subscription” approach is that it could help investors stick with their plan no matter what happens in the markets.
“Let’s face it, we humans have a tendency to want to guess the near-term direction of the market and invest accordingly. The problem is that we so often guess wrong,” Clure says. “And when we do, our choices often derail our plans. A consistent dollar-cost averaging strategy can help avoid those detrimental actions.”
The easiest way to do this is to set up weekly, biweekly, monthly or quarterly recurring investments at an amount that’s right for you, just as you automate the cost of streaming music, pet food delivery, beauty boxes or shave kits. Most online brokers and robo-advisors, including the ones who won NerdWallet’s Best-of Awards for 2021, allow you to set up regular contributions into your investment account.
The downside of this approach
If you happen to have a large chunk of cash — say, an inheritance or a bonus — there is a case for investing the entire amount as a lump sum, provided you’ve got a long investment timeline. Spreading out these contributions could actually limit your return, Clure says.
“The only drawback to a dollar-cost averaging plan is that the market rises more than it falls, making higher prices likely in the future,” Clure says. “Since that is the reality, a lump-sum investment should be considered if you have the funds available and understand the risk.”
How much does this ‘subscription’ cost?
When deciding how much to invest through dollar-cost averaging, the reality is anything is far better than nothing, and starting sooner is better than later. That’s because compounding returns are magnified even further when paired with regular contributions.
For example, if you invested $1,000 today with no monthly contributions, it might be worth around $1,300 in five years if you earn a 6% average annual return. But if you add $50 per month to that initial investment, it might be worth almost $5,000 at the end of five years. (Want to play around with the numbers and timeline? Explore our investment calculator.)
For the ultimate hands-off investing strategy, consider putting those recurring investments into a broad stock market exchange-traded fund or mutual fund. In effect, this means you also won’t have to think about what to invest in — these funds help you quickly build a diversified portfolio.
Since you’re likely investing small sums, look for mutual and index funds with low or no minimums, or choose ETFs, which can be purchased for a share price that may be lower than a mutual fund minimum. If you decide to invest in individual stocks instead, look for a brokerage that offers fractional shares, which allow you to purchase a portion of a stock rather than a full share. Without fractional shares, you’ll likely have leftover uninvested cash with each contribution.
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Chris Davis writes for NerdWallet. Email: [email protected].
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