Why you should be focussing on how much you’re contributing to your investments, as well as how much it’s growing!
As a Financial Freedom Coach and Financial Educator, a lot of my clients ask me for my juicy secrets on creating financial freedom.
Over the past 16 years, I’ve been investing in property and shares, for over a decade I’ve been supporting clients through financial planning or money mindset coaching and for 5 + years I’ve been actively focussed on creating passive income and financial freedom.
The most underrated secret to creating financial freedom is focusing on how much you’re contributing to your investments and how you can increase it.
So many people focus on the value of their investment and how much it’s growing (or not growing!) This is great during times that markets are performing well and you get a dopamine hit every time you open your investing app.
But what happens when the market is going through a downturn, the very time your contributions are most valuable! That dopamine hit doesn’t come and in fact the opposite happens, you begin to question what you’re doing and potentially even stop investing.
When I was financial planning, I’d have numerous phone calls and meetings with clients about sticking to the strategy and financial plan we’d created and continuing to contribute to their investments during market downturns.
You see, human beings can be irrational. Whilst we logically understand the concepts, when we see our investments fall it brings up all sorts of emotions. The fact that we are bombarded with emotive headlines from the media adds to this.
However, in order to create passive income and financial freedom you need to be consistent with your investing so compounding can work its magic and consistent with increasing the amount you are investing.
Here are four reasons why focussing on your contribution rate to your investments will catapult your financial reality.
Focusing on how much you are contributing to your investments is something that is within your control. You are not in control of how the market performs.
“Incredible change happens in your life when you decide to take control of what you do have power over instead of craving control of what you don’t” Steve Mariboli
Creating goals around how much you would like to contribute to your investments rather than how much they are growing and your net worth (the value of your assets less your liabilities) will keep you focussed and on track. It is something that is inside your control.
It also means that you are not trying to time the market (e.g. trying to buy when the market is low and sell when it’s high). Even the professionals have difficulty timing the market effectively.
It helps to take some of the emotion out of it when you see markets fluctuate, in particular when you see the value of your investment fall
One of the biggest reasons people lose money investing is because they panic when the market hits a different part of the economic cycle and either stop investing or withdraw their funds. Declining asset values can be challenging at the best of times but especially if you haven’t experienced it yet.
Focussing on your contribution strategy means you are less likely to be constantly watching the value of your investments and therefore make rash decisions.
Withdrawing funds during a market downturn when the value is less than what you have invested is called crystalising a loss. If your investment has declined in value but you still own the assets, it’s known as a paper loss and there’s the potential it will recover.
Returns vary greatly across different years and even within the year. Research from J.P. Morgan Asset Management found that the market’s worst days are often followed by its best days. They found that the 10 best days over the past 20 years occurred during the Global Financial Crisis of 2008 and at the onset of the Covid-19 pandemic in 2020.
Given no-one knows when the best days and worst days are going to be, setting your sites on your contribution goal will mean that you’re regularly investing and will be able to take advantage of the good days when they happen, and you will be buying more units at a lower price with the same amount of money during the worst times!
It’s also important to remember the recommended timeframe for holding growth assets is seven plus years. Therefore, having a goal of how much you’d like to contribute to your investments might help you stay the course.
Having a goal about how much you contribute means you are more likely to focus on consistency
With anything in life, consistency is key. Investing for a while and then stopping, whilst better than not investing at all, is going to take a lot longer to reach your goals than if you were consistent.
It helps you automate your investing
Focussing on how much you are contributing and consistent contributions allows you to dollar cost average into your portfolio. Dollar cost averaging is where instead of making a one-off investment into shares, you systematically invest a fixed amount at regular intervals regardless of the share price. It makes it easier to deal with uncertain and volatile markets by making investments automatic. It also means you are more likely to benefit from the good days when the market rallies.
The goal of dollar cost averaging is to reduce the overall impact of volatility on the price of the asset as it will vary on each investment. It stops you from trying to time the market to buy at the best price as even the professionals struggle to get this right.
For example, if you have a contribution goal of $12,000 for the year you could invest $1,000 per month or $231 per week. Let’s say you’re investing in a diversified portfolio, but for the purposes of showing how dollar cost average works $100 per week is going into a specific share or Exchange Traded Fund (ETF). Over 6 weeks, that’s $600. The table below shows how many units are purchased each week, the number of units owned and the overall value.
|Week||Share Price of share or ETF||Contribution||# Units Bought||# Units Owned||Overall Value|
The average price is $65.33 even though the share price has increased to $66.
In summary, set a goal of how much to contribute to your investments as this is something you can actually control and it will help you regulate your emotions when markets inevitably fall in value at some point during your investing journey. Not to mention it will help you be consistent and automate your investments.
And always remember…..
“When you invest, you are buying a day that you don’t have to work” Aya Laraya