Quarterly Investment Guide

A key financial habit that can make you rich

Elizabeth MacBride, special to CNBC.com

Many investors could be scared of market volatility right now. But those that allow the fear to keep them from investing or to force them out of the market are making a mistake. If you wait and miss the rebound, you're like to miss out on a lot of gains. And in any kind of market, said Burt Malkiel, the famous economist, the move that gives you the best odds of getting rich is the most basic: Start investing.

Burt Malkiel has spent a lifetime preaching two ideas to American investors to help them get rich: Eschew active management and invest in index funds, and save and invest regularly. On the first, there's been some progress. About a third of investors own an equity index mutual fund, according to the Investment Company Institute.

On the second, the American people get a big fat F.

Despite the fact that the single investing habit most likely to make you rich — investing regularly and consistently inside and outside of your retirement plan — is the simplest, hardly anyone does it.

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"If we have a problem in this country," said Malkiel, speaking from the point of view of an economist. "It's a problem of inadequate savings." Malkiel is the author of the classic "Random Walk Down Wall Street" and currently the Chemical Bank chairman's professor of economics, emeritus at Princeton University and CIO of online investment advisor Wealthfront. "It isn't simply a one-time affair, but one should save regularly," Malkiel said. "It doesn't matter if you make 20 percent on your money or 2 percent or .5 percent of 1 percent. If you have nothing to invest, you don't make any money. It all starts with saving and investing."

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Only about 55 percent of Americans are invested in the stock market at all, down from 60 percent in the late 1990s, according to a 2014 Gallup poll. And almost all American households that are investors are invested through their retirement plans. Investing enough in your retirement plan is a crucial beginning — but if you want to be rich, it's just the beginning.

For one thing, you can turbocharge your 401(k) by making the maximum contributions. In 2015 you can now contribute $18,000 per year, that's up from $17,500 in 2014. For those over age 50, the maximum contribution is $24,000. So if you invest $18,000 over a 40-year working life, you are almost assured of retiring as a multimillionaire, with more than $2 million in assets (assuming a 6 percent return).

The quicker, albeit riskier, path to riches also depends on saving and investing — in addition to your retirement savings. For instance, if you start investing $500 a month at age 22 with a conservative 6 percent rate of return, you'll have close to $100,000 within about 10 years and a quarter-million dollars within about 20 years. If you adopt the habit of investing young, lots of good things are likely to happen: You will love the feeling of security and keep investing more, and you will learn how to take some measured, careful risks with your pool of assets. It's those opportunities that you make for yourself that will likely lead to real wealth.

In a volatile market, investing regularly is even more crucial. Consider the comparison of $1,000 invested regularly in a volatile market, versus $1,000 investing in a rising market. You'd expect that latter to producer higher returns. Not so. Because you can buy more shares during a flat or volatile market rather than a rising one, you get more for your money.

Adopting investing as a habit — a real habit, as basic and as psychologically strong as, say, brushing your teeth every night — gives you three big advantages:

1. You accumulate money.

If you put yourself on a regular investment regime, you'll save more. If you don't treat investing as a habit — in other words, if you invest as you get a windfall, when you remember to do it or when 'the time is right' — chances are you will save less. "You'll forget to write the check," Malkiel said.

If you have a pool of assets to use, outside your retirement money, you'll be able to build wealth in other ways. Think of what you can do with a pool of assets: buy property, invest in a start-up or take yourself back to school for a higher-paying job.

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Some of the characteristics that set wealthy people (those with $3 million in investible assets) apart from others, according to a 2014 U.S. Trust survey, are that they were more willing to take credit risk. In other words, they took the assets they had built up and leveraged them to get more.

Marc Compton, U.S. Trust, Bank of America managing director in Silicon Valley, said wealthy people tend to take a pool of assets and then pick three or four projects to invest in. Possibilities include real estate, investing in a company, investigating an idea or working on a project such as a book. They will leverage their talent networks and keep a handful of irons in the fire, looking for one that starts to take off. "You're going to create something because that's where the order of magnitude comes in," he said.

But it all starts with having a pool of assets that frees up your time and gives you a little bit of money to begin creating more wealth. "It's about saying, 'I have a nut here and let's see if I can go if I can do something special with it,'" Compton said.

2. You avoid emotional booby traps.

Investors are prone to be either fearful or overconfident. History shows they buy and sell at almost exactly the wrong times: That's why, over the past 30 years, equity fund investors have made less than 4 percent annually in the market, compared with an 11 percent return for the S&P 500, according to Boston-based research firm DALBAR.

If you adopt investing as a habit — small sums regularly over time — you're more likely to be able to stick to it. "Maybe this is the corollary to the main point," said Malkiel. "You've got to have the guts to continue this when things are bad. Anyone who lived through 2008 knows that isn't so easy."

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In fact, according to the same DALBAR study, in October 2008, equity investors lost 24.21 percent compared to an S&P loss of 16.80 percent for a net underperformance of 7.41 percentage points.

"You do it regularly because if you stop when the market is down, you lose all the advantages of doing it," Malkiel said.

Are fees draining your retirement funds?
Are fees draining your retirement funds?

3. You get the bonus of dollar cost averaging.

If you invest regularly over time, "you buy more shares when the price is low than you do when the price is high. Therefore, your average cost is less with regular investing than the average of the prices the market gives you," Malkiel said.

Academics debate whether dollar cost averaging or investing the same amount as a lump sum earns you higher returns. But dollar cost averaging is likely to your advantage, especially in a volatile market, when it's most likely you're going to freak out and bail out. But if you can embrace the idea and use it to help you stick to your investing regimen, that's probably advantage enough. "There are some times that would put your money at the top of the market, but you will also be likely to put money in at the bottom," Malkiel said.

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The evidence is clear that adopting this one single habit will help you get rich. But how do you prompt yourself to do it? Take one single step (this is presuming you're already investing in a retirement plan at work).

Set up an automatic transfer from your bank account to an investment provider. Some banks sell investment funds; it's just a matter of transferring money internally. You can also set up automatic deductions from your bank account to an outside investment services company. Then just make sure the money is automatically invested once it hits the mutual fund company and doesn't wait for your instructions on how to invest it.

Automatic transfers are a simple solution to a deceptively simple problem of how to become a regular investor. "Savings involves discipline," Malkiel said. "Most of us don't have much."

—By Elizabeth MacBride, special to CNBC.com