How to Set Up Auto Investments

Auto Investment Basics and Benefits

Automated or auto investments, sometimes referred to as robo-investing, are a process or system that invests your money for you based on some pre-defined rules or parameters. In the most common application, you link your bank account to a brokerage or investment platform and have them automatically transfer set amounts to your investment account at regular intervals. Then, based on your risk tolerance, financial objectives, and investment preferences, you would select an investment portfolio for the money to be invested in. This usually entails building a portfolio of funds based on your investment strategy. The most significant benefit of auto investing is discipline because you will be making regular contributions to your portfolio even when markets are volatile. By not having to monitor the markets on a daily basis, you get to take advantage of dollar-cost averaging and, over time, money gets invested in your accounts without much effort on your part. Automated investing strategies can be used by beginner investors just starting out and experienced investors who simply want to manage some portion of their portfolios on autopilot.

Know Your Goals and Risk Tolerance

Before you can effectively set up auto investments, it is crucial that you determine what you are trying to accomplish. Are you saving for retirement, a home, a child’s education, or building an emergency fund? All these things have different timelines and dollar values associated with them. These timelines will help you determine the portfolio composition you are most comfortable with and how much and how often you will be making contributions. Risk tolerance is another important factor you should take into consideration. Some investors are more comfortable with stable, lower returns and thus would avoid too much volatility in their portfolios. Other investors may be more aggressive and look for ways to take on more risk in exchange for a chance at higher returns. To figure out your risk tolerance and make better investment decisions, you can take the many online quizzes available or speak to a qualified financial advisor.

Selecting the Right Platform or Robo-Advisor

Your next step to setting up auto investments is choosing an auto-investment platform or a robo-advisor that best fits your needs. In the robo-advisors category, there are several established players like Betterment, Wealthfront, M1 Finance, and other similar platforms. They all have slightly different features and offerings but are generally very similar. These platforms have some unique bells and whistles that you may or may not be interested in, like tax-loss harvesting, environmentally friendly and socially responsible investment options, or ultra-low fees. On the other hand, you may want to look at some of the automated investing services that several banks and brokerage firms offer as part of their existing platforms and accounts. When choosing a platform, always take into account such factors as fees and minimum investments, ease of use, the ability to customize your portfolio, and access to educational resources and customer support.

Setting Up Recurring Contributions

One of the main advantages of automated investing is the ability to make regular contributions to your investment portfolio. Most platforms allow you to set up an automatic transfer from your checking or savings account to your investment account on a regular schedule, be it weekly, biweekly, monthly, or quarterly. Your choice of how often to make these contributions should be guided by your cash flow and budgeting considerations. For example, if you set up your automatic contributions on a biweekly basis, timed with your payday, then you can ensure that you invest part of your pay automatically before you even have the chance to spend it. The amount of the contribution is up to you, but the idea is to start somewhere, and then as your income or financial situation changes, you can always increase or decrease the contribution amount.

Selecting Your Investment Portfolio

The next logical step in setting up auto investments is the selection of the investment portfolio into which your money will be invested. To do this, most platforms will have you first identify your investment goals and risk tolerance, which will then lead to a suggested portfolio of investment funds that is aligned with these parameters. These suggested portfolios are usually comprised of a diversified collection of asset classes, including various stocks, bonds, REITs, and other cash equivalents. Many platforms will also offer a portfolio rebalancing feature which will automatically rebalance your portfolio periodically back to your target allocation. This rebalancing is generally done for you by the platform’s automated trading system and is based on algorithms that maintain your portfolio’s target risk level as market conditions and asset prices change. It is, therefore, important to understand how this target allocation affects the risk and return profile of your portfolio, as a very conservative target may not provide you with much growth over time and an aggressive allocation could result in portfolio values that could make you uncomfortable.

Understanding and Using Dollar-Cost Averaging to Your Advantage

One of the concepts of investing that work particularly well with auto investing is dollar-cost averaging (DCA). This concept is simple in that when you invest a fixed amount of money at regular intervals into the market, when the prices are high, you will buy fewer shares, and when the prices are low, you will buy more. This means that over time, as the market moves up and down, your average cost per share is lower than the actual average price at which you bought those shares. Automated investments naturally use dollar-cost averaging by their very nature of being invested at regular intervals. This also removes some of the emotional aspects of investing and reduces the perceived risks of investing at the top of the market.

Monitoring and Adjusting as Necessary

One of the best features of auto investments is that once you have set up the appropriate parameters for your automated investment account, you can set and forget your investment strategy and just leave it be. That said, to ensure that you are still on track to meeting your investment goals, it is a good idea to do at least an annual or semi-annual review of your investment portfolio. This will give you the opportunity to make any necessary adjustments to your portfolio and strategy if you discover that your allocation is no longer at your desired target risk level, or your financial goals have changed. Most platforms will provide you with a dashboard showing your overall investment progress and performance, as well as any contributions made to your accounts. This dashboard can be used as a guide as to when you should make any changes to your auto-investment setup.

Pay Attention to Costs and Fees

One of the benefits of automated investing is that it usually comes with very low fees attached to it. However, this does not mean you should not pay attention to the fees associated with your auto investment account. Fees like management fees, fund expense ratios, and transaction fees can take a significant chunk out of your overall investment returns over time. It is important, therefore, to compare the costs of different platforms and funds and to choose those with the most transparent pricing and no hidden fees. Furthermore, many platforms will waive their management fees once you reach a certain investment amount, and some offer commission-free trading on ETFs and mutual funds, which can help maximize the growth potential of your investment money.

Consider Tax Efficiency

Taxes are one of the things that can significantly impact the growth of your investments, so tax efficiency is a critical consideration for your auto investments setup. Many robo-advisors will incorporate tax-loss harvesting features into your portfolio. Tax-loss harvesting refers to the practice of selling positions that are in loss to offset capital gains realized in other positions in your portfolio. Automated rebalancing can also be executed with tax-efficiency in mind, so as not to incur additional capital gains. Additionally, tax-advantaged accounts like IRAs and 401(k)s can also be used to further your long-term savings goals in tandem with auto investments.

Setting up Auto Investments for Different Accounts

Auto investments can also be set up in various types of accounts, including taxable brokerage accounts, retirement accounts like IRAs and 401(k)s, education savings accounts like 529 plans, and other similar investment accounts. Each of these accounts has their own rules on contribution limits, taxation, and withdrawal restrictions and other rules and nuances that one should be aware of when setting up auto investments. For example, automating contributions to an IRA account will mean after-tax money is invested and can grow tax-free, giving you a significant long-term benefit.

Challenges in Auto Investments

As mentioned before, one of the great things about automated investments is that it does not require that much maintenance or ongoing effort. However, this does not mean that challenges do not exist. In fact, several common issues arise for some investors who want to automate their investments. Some of these challenges include the fear of handing your money over to a computer and worrying about whether or not your investment strategy is appropriate. Another challenge is forgetting to review and adjust your portfolio to ensure that it is still on track to meeting your investment objectives. To help mitigate these challenges, it is important to take the time upfront to research and learn about investing basics and thoroughly research the different platforms and investment strategies. You should also set up periodic reminders for yourself to check in on your investments.

Complementary Financial Habits

Investing is just one part of a comprehensive financial plan. So even though you should automate your investments and make them as hassle-free as possible, there are other financial habits you should pair with your automated investments to maximize their effectiveness. For example, keeping a detailed budget and an emergency fund will allow you to avoid the need to prematurely liquidate your investments in times of financial stress. Aggressively paying down high-interest debt and then applying those funds to your automatic investments is also a great way to turbocharge the growth of your portfolio. Finally, always remember that auto investing is just a tool in your financial toolbox, and the more you know about other areas of personal finance, the more you can benefit.

Conclusion: Embrace the Power of Automation

Setting up auto investments is a relatively simple process that, if done properly, can help you build wealth and grow your investment portfolios without much effort on your part. To set up auto investments, it is important to first establish your investment goals, risk tolerance, and time horizon. This will allow you to choose the investment portfolio that best suits your needs, and it will help you automate your investments without requiring that much effort on your part in the future. The concepts of rebalancing and dollar-cost averaging are key to making auto investing work for you. Additionally, automating your investments is one of the best ways to build your investment portfolios and achieve your long-term savings goals.