An automatic investment plan (or AIP) can refer to various options: an automatic investment plan might be part of a retirement account, or it could be an investing platform, like a robo advisor, that enables you to make regular investments, automatically.
Automatic investment plans can help you save and invest steadily over time. You can set up your plan in advance, and then leave it more or less to run on its own — until your needs or goals require a change.
Key Points
• An automated investment plan refers to a range of methods for automating savings and investing.
• You might use an automated investment plan to make automatic transfers that fund a retirement account or a college savings account.
• Robo advisors are also a type of automated investment account. Here, the investment portfolio is pre-set and managed by an algorithm.
• Automated investment plans tend to be low- or no-cost, and they can be helpful for those who don’t want the hassle of managing an investment portfolio.
• Investors can work with a human advisor as well as using an automated plan.
What Is an Automatic Investment Plan?
An automatic investment plan might include making regular deposits into a retirement plan like an IRA or 401(k), using a robo advisor (or automated portfolio), participating in a dividend reinvestment plan, as well as other options.
What these programs have in common is they give investors the ability to choose an amount they want deposited, the timing of the deposits (e.g. weekly, quarterly), and in many cases which types of investments to fund.
The rise of sophisticated technology and algorithms have helped make automatic investment plans more accessible and secure, as well as more customizable, especially when investing online. Investors can direct money to be withdrawn from their paycheck or from a personal account on a biweekly basis, for example, and invested in a retirement portfolio.
It’s all part of the growing trend around automating your personal finances.
Types of Automatic Investment Plans
While using automatic investment plans for retirement is a common scenario, there are others — including the option to choose more- or less-automated types of investment products or preset portfolios.
Among the different types of automatic investment accounts, or accounts that can be funded automatically:
• Automatic transfers to a 401(k), 403(b), or personal IRA accounts
• Automatic transfers to a 529 college savings plan
• Micro-investing platforms (or spare-change savings accounts). These use very small amounts of cash, typically rounded up from purchase amounts, to make deposits in an investment portfolio that may grow over time.
• A dividend-reinvestment plan (DRIP) which helps investors reinvest their cash dividends automatically
Types of Automated Investment Products
There are also different types of mutual funds as well as automated portfolios (sometimes called robo advisors) which investors can use as part of an automatic investment plan.
• Target date funds can provide investors with a long-term retirement or college savings portfolio. These funds are typically based on an allocation of different asset classes that adjust automatically to become more conservative over time, until the person needs to withdraw the funds.
• A robo advisor, or automated portfolio, is a preset portfolio typically of low-cost exchange-traded funds (ETFs). Investors use an online platform to fill out a questionnaire about their preferences, goals, risk tolerance, and time horizon.
The securities and the allocation in each portfolio are generally fixed, but investors can typically choose from different portfolios that match their preferences.
Recommended: Automated Investing 101
How Does an Automatic Investment Plan Work?
The “automatic” part of an automatic investment plan can refer to the automated deposit of funds, usually on a regular schedule. But it’s not just a way to automate your savings. It can also refer to stock dividends being reinvested automatically, or automated mutual funds (like target-date funds), or robo portfolios, as noted above.
The foundation of almost all automatic investment plans is the use of sophisticated technology to ensure the allocation of funds in a portfolio reflects an investor’s needs and goals. While some people might view these options as “hands-off” or “set it and forget it” — and they can simplify a number of investment choices for investors — using an AIP doesn’t mean your money is on autopilot.
Investors will always need to pay some attention to any kind of investment plan, but that said many AIPs do offer investors some advantages.
Benefits of an Automatic Investment Plan
Most brokerages and workplace plans offer some kind of automated options for investors these days. The reason being that behavioral research has repeatedly shown that investors are prone to make emotional choices under certain circumstances (for example, when the market is volatile).
Automated plans provide basic guardrails that can help keep investors on track, investing steadily over time, rather than reacting impulsively to trends or headlines and trying to time the market.
Dollar Cost Averaging
Another benefit of automated plans is that they are designed so that you invest the same amount at regular intervals. This strategy, known as dollar cost averaging, is important for a couple of reasons:
• Automating deposits may help build savings over time, because you’re less likely to spend that money once it’s invested.
• Dollar cost averaging is the practice of investing consistently over time, whether the market is up or down, which can lower the average cost of your investments.
Time Savings
Another advantage of using an AIP is that it can save you time and energy, especially if researching or managing investments is not your strong suit.
Types of Investments to Automate
These days automatic investment plans are available for a range of goals. As discussed earlier, you can choose to automate your retirement savings, your personal investment portfolio in a taxable account, a 529 plan, stock dividends, and other options such as micro-investment accounts as well.
These kinds of AIPs can compliment other aspects of financial automation that you may already be using: from budgeting and saving to paying bills.
💡 Quick Tip: Can you save for retirement with an automated investment portfolio? Yes. In fact, automated portfolios, or robo advisors, can be used within taxable accounts as well as tax-advantaged retirement accounts.
Is Automated Financial Planning Right for You?
In general, automatic investment plans may work for people who want to be on top of their finances, but may not have the time or the inclination for detailed investment management.
In that way, the convenience and lower cost of many automated investment plans and robo platforms can help newer investors (or less involved investors) get started.
Investors who aren’t comfortable with relying on technology may not want to invest using automated systems.
Human Advice and Automation
That said, automated investing isn’t a strategy for avoiding money management or financial planning completely. Most investors’ portfolios and financial plans include details or circumstances that require human insight or input. Estate planning, owning a small business, or prioritizing among multiple goals, for example, can be complicated.
Although it can be simpler to automate some parts of the investing or financial planning process, a human advisor can help ensure that you aren’t missing anything. Also, investors who use automated portfolios typically have less control over their investments.
Fortunately, automation here can also work in your favor: You can set alerts to remind you when certain withdrawals are being made.
Recommended: Robo Advisor vs. Financial Advisor: Which Should You Choose?
Starting an Automatic Investment Plan
Starting an automatic investment plan is pretty straightforward. Start by identifying the primary goal for using an automated platform.
• Do you want to save for retirement at work, or is this a personal retirement account?
• Do you want an automated investment portfolio that’s preset, like a robo advisor? Or do you want to set up your own portfolio?
• Do you own dividend stocks, and does it make sense to set up a dividend reinvestment plan?
• Are you setting up a college-savings plan for a student?
Then, as you explore a few different options, you want to consider the following:
• Is it a reputable platform, account, or app? Hint: Most online brokerages and financial firms offer a few automated options, so it may be possible to stay with your current provider.
• Is the platform easy to use? Can you easily make adjustments to your deposits, as needed?
• What are the fees?
What are the requirements?
• Is there a minimum amount required to open the account, or for each deposit?
• How much flexibility do you have when choosing investments (and is that important to you)?
Using an Automatic Investing Plan
Using an AIP is generally self-explanatory because generally these programs were created for investors who want a streamlined experience. Once your account is open, you typically set up a direct deposit of funds, and select the investments you want in your plan.
If you’re working with a financial advisor, they can help insure that the platform you choose will support the rest of your financial plan. If you’re flying solo, you can begin to do research into how your automatic investment plan works together with other goals.
The Takeaway
One of the best things about automated financial planning is that in most cases you can be as hands-off (or hands-on) as you choose. Using an automatic investment plan these days provides a number of options, including active investing, retirement, and robo advisor options. Automated doesn’t mean you can literally “set it and forget it”; it always pays to track your investment portfolio, and think about your long-term plans.
Ready to start investing for your goals, but want some help? You might want to consider opening an automated investing account with SoFi. With SoFi Invest® automated investing, we provide a short questionnaire to learn about your goals and risk tolerance. Based on your replies, we then suggest a couple of portfolio options with a different mix of ETFs that might suit you.
FAQ
How do you automate an investment strategy?
You can find an automatic investment plan (AIP) that will match your goals and help you set up or fund a portfolio. That said, you can’t automate your entire investment strategy: Ideally, an AIP would be a tactical piece that fits into your overall strategy.
How often should I auto-invest?
You want to keep up a steady cadence of deposits to make progress toward your goals, and to reap the benefits of dollar cost averaging. You might consider auto investing once a month to start and see how it goes.
What are the benefits of starting an automatic investment plan?
There are a number of advantages to using an automatic investment plan, including the fact that it can help keep your investment plan on track, even if you’re tempted to make changes when markets fluctuate. In addition, an AIP can save time and may help lessen the impact of market volatility.
Photo credit: iStock/GarryKillian
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