Fidelity Recurring Investments: How to Set Up & Why Bother?
Fidelity Investments offers a powerful tool called "Recurring Investments," a feature designed to automate your investment contributions. Understanding how to set this up and why it's beneficial can significantly improve your long-term financial well-being. Let's delve into the mechanics and advantages of automating your investments with Fidelity.
The core principle behind recurring investments is Dollar-Cost Averaging (DCA). This strategy involves investing a fixed amount of money at regular intervals, regardless of the asset's price. This method is particularly effective because it removes the emotional element from investing. Instead of trying to time the market, you consistently buy more shares when prices are low and fewer shares when prices are high. Over time, this averaging effect can lead to a lower average cost per share compared to trying to buy a large lump sum at the "perfect" moment, which is notoriously difficult, if not impossible, to predict accurately.
Setting up recurring investments with Fidelity is a straightforward process, designed for user-friendliness. First, you'll need a Fidelity brokerage account (either a taxable account, Roth IRA, traditional IRA, or other eligible account). If you don't already have one, you can easily open one online through Fidelity's website. Once your account is open and funded, you can navigate to the "Accounts & Trade" section on the Fidelity website or app. From there, you'll typically find an option labeled something like "Recurring Transfers" or "Automatic Investments."
Clicking on this option will guide you through a series of steps. You'll need to specify which account you want to fund the investments from (e.g., your checking account). Next, you'll need to choose the investment you want to purchase regularly. Fidelity offers a vast selection of stocks, ETFs (Exchange-Traded Funds), mutual funds, and other assets. For beginners, low-cost, broad-market index funds like those tracking the S&P 500 or the total stock market are often recommended as a solid foundation for a diversified portfolio.
After selecting your investment, you'll determine the amount you want to invest each time and the frequency of your investments. Common frequencies include weekly, bi-weekly, or monthly. The frequency you choose should align with your pay schedule and cash flow. It’s generally advisable to invest as frequently as possible to maximize the benefits of dollar-cost averaging. Finally, you'll need to select a start date for your recurring investments. Once you've reviewed all the details and confirmed the setup, Fidelity will automatically execute your investment plan according to your specifications.
The "why bother" aspect of recurring investments is where the real magic happens. One of the most significant advantages is that it fosters discipline and consistency. It removes the temptation to procrastinate or deviate from your investment plan based on market fluctuations. Many people find it difficult to consistently invest because life gets in the way. Recurring investments automate the process, ensuring that you're regularly contributing to your financial goals, even when you're busy or facing unexpected expenses.
Beyond discipline, recurring investments offer several other compelling benefits. As mentioned earlier, dollar-cost averaging helps to mitigate risk by averaging out your purchase price over time. This is particularly beneficial in volatile markets where prices can fluctuate significantly. By consistently investing, you're less likely to buy a large number of shares at a market peak and more likely to accumulate shares at lower prices during market dips.
Another advantage is that recurring investments allow you to build wealth gradually, even if you don't have a large lump sum to invest. Starting small and investing consistently over time can have a significant impact on your long-term returns, thanks to the power of compounding. Compounding refers to the process of earning returns on your initial investment and then earning returns on those returns, creating a snowball effect that accelerates wealth accumulation over time.
Furthermore, setting up recurring investments can simplify your financial life. By automating this process, you free up time and mental energy to focus on other aspects of your finances, such as budgeting, debt management, and retirement planning. It eliminates the need to constantly monitor the market and make ad-hoc investment decisions, which can be stressful and time-consuming.
However, it’s important to acknowledge the limitations. DCA, while beneficial for many, might not always outperform investing a lump sum at the very beginning, especially in a consistently rising market. If you have a large sum of money available and are confident in the long-term prospects of your chosen investments, investing it all at once might yield higher returns. However, this approach also carries a higher risk, as you're essentially betting that the market will continue to rise.
Another consideration is the impact of transaction fees. While many brokers, including Fidelity, offer commission-free trading for stocks and ETFs, it's still essential to be aware of any potential fees associated with recurring investments, particularly for mutual funds. These fees can eat into your returns, especially if you're investing small amounts frequently.
In conclusion, Fidelity Recurring Investments offers a powerful and accessible way to automate your investments, foster discipline, and build wealth over time. By understanding how to set it up and appreciating the benefits of dollar-cost averaging, you can take control of your financial future and work towards achieving your long-term financial goals. While not a guaranteed path to riches, it provides a structured and consistent approach to investing that can be particularly beneficial for those new to investing or those seeking a hands-off way to grow their wealth. Remember to carefully consider your investment options, risk tolerance, and financial goals before setting up your recurring investment plan. It's also wise to periodically review your investment strategy and make adjustments as needed to ensure that it continues to align with your evolving needs and circumstances.