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What Is Automatic Investing?
Automatic investing is the process of automatically investing a set sum of money at regular intervals according to predetermined parameters.
With an automatic investment, investors can customize multiple variables such as:
- The sum of money they auto invest
- The percentage of their earnings dedicated to recurring investments
- Their risk tolerance
- A rough combination of their investment portfolio (Ex: debt, equity, hybrid, etc.)
- The durations between each automatic deposit
- How to set up their automatic withdrawals
How Does Automatic Investing Work?
Investors usually set up their automatic investment parameters via an intermediary like a bank. Similarly, employers or government agencies can set up automatic investing accounts for their employees or citizens, such as a 401K retirement account.
One of the most common ways to automatically invest is to set up automatic transfers from your bank account shortly after receiving your salary each month.
To do this, all you need to do is to set up a bank mandate to transfer money from your savings account to your investment account on a regular basis.
When you apply the same principle to stock market investing (investing the same amount every month), it leads to dollar cost averaging.
What is dollar cost averaging?
To understand dollar cost averaging, it’s important to note that the stock market is very volatile, with the prices of stocks frequently changing each day.
Because of this volatility, you'll buy shares at different prices when you invest a fixed monthly sum into the stock market. When the prices are low, you may buy more shares. But when the prices are high, you’ll end up buying fewer shares.
In the long run, all these prices will average out without heavily impacting your total purchase amount.
Dollar-cost averaging ensures that market volatility doesn’t affect your investment habit. It’s one of the biggest reasons why people opt for automated investing.
It’s also simple enough for individual investors to practice without any external help. However, over the years, more sophisticated automatic investing platforms have developed.
Robo advisors are one of them.
What are robo advisors?
Robo advisors are programs that work on unique algorithms to offer financial advice to investors. They’re essentially like a financial advisor in the form of computer programs.
As a result, they’re a more affordable way to get personalized investment advice.
Using robo advisory services is also a good way to make more accurate decisions over portfolio management. Users can set certain financial goals and parameters that the algorithm will use for asset purchases and sales.
More importantly, the algorithm’s immense data-processing ability can help with diversification. It lets you choose from a wider range of asset types, leading to more well-rounded decisions.
Robo advisors tend to optimize asset allocation to maximize returns for any particular risk class, all without upsetting the balance of your portfolio in any one direction.
Lastly, robo advisory services can often make investment decisions for you, taking out human emotions and biases from the process altogether.
2 Benefits Of Automatic Investing
Here are the two biggest benefits of auto investing.
1. Disciplined approach to investing
The biggest advantage of investing automatically is that it never allows you to second-guess your decisions.
This works best if you’re interested in a low-risk investment option.
It also protects you from the temptation to stop investing due to short-term market fluctuations or potentially loss-making day trading.
Additionally, by setting automatic deposits, you can stick to your regular investing habit and not spend that money on anything else. This is great for newer investors and those saving for specific goals such as a wedding or a vacation.
2. Data-driven decisions
With Robo advisors to help them, finance managers can make the most of your money. They can take into account hundreds of variables to forecast your ideal investment.
Moreover, all of this happens in tandem with your investment objectives, helping you grow your money the way you want to.
3 Tips To Make The Most Of Automatic Investing
Here are three tips to make the most of automatic investing.
1. Plan a budget
The first step towards any investment is planning and deciding on your spending limits. If you earn a fixed income, you could segregate your expenses into the following basic categories:
- Priority one: basic living expenses that include rent, groceries, loan repayments, medical expenses, etc.
- Priority two: savings for the short-, mid-, and long-term
- Priority three: discretionary spending on shopping, eating out, entertainment, etc.
You may choose to set aside a certain percentage of your income (instead of a dollar amount) for each use. This will accurately tell you how much you can save (automatically) without feeling cash-strapped for living expenses.
This is important because once your automatic investing plan begins, you may not be able to stop the outgoing monthly payments.
2. Determine your goals
It’s important to determine why you’re investing.
Is it for retirement? Or is there something on the short-term horizon that you’re looking for?
Determining these investment goals will help you decide what instruments to invest in and for how long.
However, do remember that even though your goals may change, your automatic investment plan may not. It’s less flexible than investing on your own, which offers you the ability to easily change your investments in response to the evolving goals and requirements.
3. Pick the right platform
Ideally, an automatic investing platform should have:
- An automatically updated dashboard tracking the progress of your investment
- Transparency about the variables being considered to make each investment decision
- Settings to change your goals and update your investment accordingly
- A responsive customer support team
Based on these requirements, we’ve picked two great automatic investing platforms for you.
2 Great Automatic Investing Platforms
Here are two automatic investing platforms that you could consider:
This micro-savings app focuses on investing your spare change over the long run. It’s ideal for newbie investors, those saving for their retirement plan, and people with a limited savings potential.
Users between ages 18 and 23 don’t have to pay any management fees and can use Acorn for free.
Investors can link as many bank accounts and credit cards to their Acorns account as they want. Each time they purchase something, Acorns rounds it up to the closest dollar and invests the balance amount into a range of different ETFs (Exchange Traded Funds).
Acorns’ plans have been designed with help from Nobel prize-winning economist Dr. Harry Markowitz. Your money on Acorns will find its way to ETFs from recognized investment management firms like Vanguard Mutual Fund and BlackRock.
Here’s an example of how this all works:
If you bought groceries worth $57.50, Acorns would automatically round that up to the nearest dollar and invest $0.50 into your portfolio. This way, each time you make a purchase, you may end up growing your portfolio a little bit.
Acorns also lets you set up a custodial account for your children (Acorns Early) and even invest in an IRA (retirement savings account) with Acorns Later.
You can choose from the following account types with varying degrees of investment risk:
- Moderately conservative
- Moderately aggressive
You can also track your investment on Acorns’ easy-to-use mobile app.
There’s no minimum investment barrier on Acorns.
Acorns’ performance depends on your investment plan and the time you hold your portfolio for. For younger investors who chose the Aggressive plan, returns have been nearly 13% annually.
Finch is a Robo advisor that automatically invests your checking balance into a diversified portfolio of ETFs each month. However, you can still access this invested cash balance with your Finch debit card.
Finch offers an all-in-one investing and checking account. Once you’ve opened your account, it provides personalized recommendations to build you a portfolio comprised of investments in low-cost ETFs.
Investors can opt for one of two ETF packages:
- Stable: short term US treasuries, short term corporate bonds, and cash
- Growth: a basket of US stocks, bonds, and cash
You can withdraw your Finch money free of charge from any of the 55,000 ATMs across the country.
Finch doesn’t require a minimum deposit in the account, but to start investing and receive a debit card, you’ll need to deposit a minimum of $5.
Finch claims that they help your balance grow by 50% over ten years using this method.
Start Investing Today
Auto investing is a great investment strategy to build an investment habit and start growing your portfolio.
If you’re looking for other investment opportunities, such as investing in fractional shares or a tax saving investment product, take the MoneyMade Investor Quiz. Answer a few questions about your investment preferences to find investment solutions that suit your unique needs!