Investing isn't complicated, but it can be hard. The reason is that human emotions play an oversized role in investors' decisions to buy and sell stocks. Over time, however, multiple strategies have been developed that help investors combat these emotions.
In this clip from the Industry Focus: Financials podcast, The Motley Fool's Gaby Lapera and Dan Caplinger discuss two such strategies: dividend reinvestment plans and automatic 401(k) contributions. Listen in to hear how these can help to maximize your returns with little to no effort on your part.
A full transcript follows the video.
This podcast was recorded on June 27, 2016.
Gaby Lapera: Another example of one of these plans is a DRIP plan is what it's called colloquially, but that is a dividend reinvestment plan.
Dan Caplinger: That's right. That goes with if you own stocks that pay dividends, you have a couple options. You can either have the company pay the dividend to you in cash, but what a lot of people do instead is instead of taking that cash, maybe they don't need the income right now, instead they tell the company to keep the dividend and buy some extra shares with it. Again, this kind of acts the same way as an automatic investment program does. Every quarter that the stock pays that dividend, it goes right back in to buy additional shares.
You'll find over time, a lot of people if they start out with say 100 shares of a dividend stock, you hold on to it for years and years and years, eventually you get to the point where the shares you bought with dividends are more than the shares that you originally bought with your original purchase. That really shows you just how valuable those dividends can be for a long-term investor.
Lapera: The really cool thing about DRIP investing is that with DRIP plans you are allowed to buy portions of stocks, which is not something you can do on the stock market.
Caplinger: That's right. If you have X dollars and X cents, your company will let you buy, I think it's all the way down to 10,000th of a share. You never have to worry about is my dividend big enough to buy a whole share of some company like Google that's got the $600, $700 share price. No, you can get a fractional share and that lets you get into those investments, even though they have a high share price.
Lapera: Yeah. Our final example of an automatic investment program is a 401(k) contribution. Something that I'm sure, I hope, a lot of you have set up to automatically go into your account from your paycheck every month so you don't even have to think about it.
Caplinger: That's right. It's just one example of the way -- in that case you have it taken directly from your paycheck and it stays at your company. The automatic investment plans that we've been talking about before, that usually works, it's taken out of your checking account or your savings account once your paycheck's already hit your bank account, that's when the financial institution comes in. Whenever it comes out, the important thing is that it's being invested regular basis, over and over again, sticking with a long-term plan which is your best chance at financial success.
Lapera: Definitely. I want to reiterate for our listeners that what's going on right now is just a bump in the road, it's not the end of the road. I really love biology, I don't know if you guys knew that about me. This is a great time to be an opportunistic scavenger. This is a great time to be a turkey vulture and swoop in and pick up shares at a discount that someone else wrecked for you. It turns out that that deer that you're picking at, that dead deer, it's actually a zombie deer. It's going to pop right back up and walk away, but right now is a really good time to grab a little piece of it while you can.
That might be a gory analogy for some of our listeners, but this is a really exciting time to be an investor and a biologist.
Caplinger: That's an awesome analogy, Gaby.
Lapera: I'm really glad you liked it. Do you have anything else you want to add, Dan?
Caplinger: Reiterating everything that you just said, these situations are difficult to keep in perspective when they're happening. In hindsight, the most common regret is that people didn't take advantage of the opportunity when it was there for them. Don't make that mistake. Take a look at your portfolio, think about the things that you can do to take advantage of the situation while it's here. There's no guarantee it's going to be here for very long.
