Rule #3: Make regular investments

Index investing is about following an index, but this project is also about making regular investments. This has several benefits, which will be discussed below. However, there is more to consider.

Put your money to work ASAP

The first benefit is that you invest your money as soon as it is available. That way, you have the most of your money invested in the stock market, thus benefiting the most from it’s expected growth.

It is not about timing the market, but about time in the market

Keep in mind that I’m not suggesting to invest all your money. You should keep a certain amount save and readily available in case unforeseen events happen. Your washing machine or car might need break down, or you could lose your job. These unfortunate events do happen, and when it does, you want to have an emergency fund (to be created).

Dollar Cost Averaging (DCA)

Another benefit of making regular investments is dollar cost averaging. DCA means that by investing a fixed amount into the same fund on a regular basis, you average the price. But it is not a normal average number, its a weighted average. That has a great benefit: the average price you have paid, will be lower than the average price!

Let me explain this principle with an example. Suppose you invest $1000 every month into an index fund. The index will vary in price, as will the underlying stocks. Suppose also that the index price will be $11 in January, and $9 in February. The average price will be $10. However, your $1000 per month investment will have bought (1000/11=) 90.9 shares in January and 111.1 shares in February. In total, you have 202.01 shares. Your DCA price, the weighted average price is not $10, but (202.01 / 2000) $9.90 per share! This is because you were able to buy more cheaper stocks than expensive stocks.

So, when stocks are a bit more expensive, you buy less stocks. Conversely, when stocks are cheaper, you can buy more stocks for the same fixed amount of money. The result is that the cheaper stocks have more than 50% of the weight in the total.

Even in a long term flat market, you can make a profit with DCA.

How often should I make regular investments?

So far, we discussed the benefits of making regular investments. In fact, if we tried to get as much time in the market as possible, and try to maximize DCA, we would make as frequent investments as possible. However, there are costs involved with every transaction. We cannot disregard Rule number 1: keep costs to a minimum.

So, there is a trade off between the benefits of regular investments and the costs which begs the question: How often should we invest? We can invest small amounts every week, a fixed amount every month, or save up amounts and invest every quarter or even once a year. I will make a calculation based on my specific situation, but feel free to plug in your own numbers in my Investment Frequency calculator (to be created).

type input
amount available €1000 per month
transaction costs 8.5 + 0.15%
expected growth 8%
Regular investments vs Value
time weekly monthly quarterly yearly
week 1 221.92
week 2 444.19
week 3 666.79
week 4 889.74 990.00
week 5 1113.03
week 6 1336.67
week 7 1560.65
week 8 1784.97 1986.60
week 9 2009.64
week 10 2234.66
week 11 2460.02
week 12 2685.73
week 13 2911.78 2989.84 2987.00
week 14 3138.18
week 15 3364.94
week 16 3592.04
week 17 3819.48 3999.78
week 18 4047.28
week 19 4275.43
week 20 4503.93
week 21 4732.79 5016.44
week 22 4961.99
week 23 5191.55
week 24 5421.46
week 25 5651.72
week 26 5882.34 6039.88 6033.74
week 27 6113.31
week 28 6344.64
week 29 6576.32
week 30 6808.37 7070.15
week 31 7040.76
week 32 7273.52
week 33 7506.63
week 34 7740.10 8107.28
week 35 7973.93
week 36 8208.12
week 37 8442.67
week 38 8677.59
week 39 8912.86 9151.33 9141.41
week 40 9148.50
week 41 9384.49
week 42 9620.85
week 43 9857.58 10202.34
week 44 10094.67
week 45 10332.12
week 46 10569.94
week 47 10808.12 11260.36
week 48 11046.67
week 49 11285.59
week 50 11524.88
week 51 11764.53
week 52 12004.55 12325.43 12311.24 11973.50

Conclusion

I should be making regular investments. Optimally, I would be making investments about once a month. Albeit small differences between montly and quarterly, this should have the best results for me in the long run.