How to Successfully Build Wealth With Systematic Investing

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Want to know the worst wealth building advice? It’s the get rich quick strategy. The only way to build wealth is with systematic investing, or saving and investing a relatively small amount of money consistently over a very long period of time.

Instead of trying to get rich in five years, you need a plan to build wealth over 20 or even 30 years.

This time frame is much more doable because it taps into the time-value of money, something short-term wealth building strategies cannot.

On the surface, systematic investing doesn't seem all that exciting. However, it gives you the opportunity to build wealth slowly and steadily over time.

It even stacks the investment deck in your favor, because with systematic investing you become an irresistible force. No matter what happens in the market, you keep adding to your portfolio and investing in it consistently. This kind of relentlessness investing, on a day-to-day basis, can pay off with a great deal of wealth later.

How does systematic investing work?

Leverage Payroll Savings

Payroll savings are essentially the bedrock of systematic investing. By allocating a small amount of your paycheck to your investment account, the money will flow into your portfolio with each paycheck you receive.

Because the money goes into your investing account directly, you never see it so you'll never miss it. It builds up quietly and consistently.

If you do not already use payroll savings, start right away! You are probably already familiar with doing this for your company's 401(k) plan. Have money direct deposited into non-retirement investment accounts as well — such as an investment brokerage account or even mutual funds or exchange traded funds (ETFs).

Use Other Periodic Savings Methods

Aside from payroll savings, there are other ways to invest systematically that can be especially important if you're self-employed.

You can choose to invest large windfalls of money you receive on a regular basis. This can include commission or bonus income as well as income tax refunds.

Whatever the source, it’s important that you move the money into your investment accounts immediately so it doesn't end up getting spent elsewhere.

Emphasize Funds Over Stocks

It’s often thought that investing in stocks is more effective for making large returns than investing in mutual funds and ETFs. In the right hands, that may be true. But for most people — including virtually everyone whose primary job isn't in the investment field — funds are the better investment choice.

Each fund represents a portfolio of stocks that is managed by a professional, even better than mutual funds and ETFs are index funds. These funds are correlated to move with their underlying markets.

There is less trading within index funds, so transaction fees will be much lower. Index funds also tend to outperform actively managed funds over the long-term. Best of all, you can invest your money in index funds and then just go about the rest of your life, knowing that your investments are running on autopilot.

Avoid Major Losses

Avoiding losses is a critical component of systematic investing and will mean avoiding the most volatile investments — or at least holding only very small positions in them. If you favor funds over stocks, you will reduce the volatility.

Index funds will reduce it even more than mutual funds or ETFs. Emphasizing dividend-paying stocks will help even more because not only will the dividends provide you with a consistent income, but they also provide some protection when the stock market is falling.

Beyond stocks, your portfolio should also be diversified into safer asset classes, including bonds, treasury bills, certificates of deposit, and even certain utility stocks.

Though you may think putting all of your money in stocks will enable your portfolio to grow faster, sometimes it has the opposite effect. A portfolio invested 100% in stocks will certainly benefit in rising markets, but you'll be completely overexposed to losses during declining markets.

Fixed-income investments will reduce market losses during declines, and also provide you with capital to buy up stocks after those declines have run their course.

Consider Dollar Cost Averaging

Another way to avoid losses — and one that works particularly well with systematic investing — is dollar cost averaging. Under this method, rather than buying investments in large chunks, your payroll deductions go right into them in small, consistent amounts.

This evens out investment purchases. Rather than purchasing $5,000 of Stock X at $50 per share, you instead buy it gradually over the course of an entire year. This will take the guesswork out of when to buy into certain investments.

Therefore, you don’t need to buy it at a certain price, you’re buying it continuously. This will minimize the potential the $50 stock purchased in one trade might drop to $25, wiping out 50% of your investment.

If you want to be a successful investor, ignore any notions that look anything like “get rich quick” schemes. You are more likely to build wealth with systematic investing than with even the best concocted scheme.

Kevin Mercadante

Kevin Mercadante is professional personal finance blogger, and the owner of his own personal finance blog, OutOfYourRut.com. He has backgrounds in both accounting and the mortgage industry. He lives in Atlanta with his wife and two teenage kids.

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