The stock market gives investors many opportunities to earn returns, but staying on top of investments can get tedious. If you rely on remembering to contribute to your portfolio each month, you may forget some months and fall behind your financial goals. Automatic investments allow you to grow your portfolio even if you forget. Many brokerage firms offer this feature so your portfolio grows in the background. Here’s how to auto invest and why it’s a staple for many aspiring retirees.
What is Auto Investing?
It’s easy to take for granted how easy it is to invest. Only a few decades ago, people turned to newspapers for stock quotes and had to call a broker to execute buy and sell orders. For decades, investors on the trading floor conducted their trades using open cry, which is exactly what it sounds like. Investors would shout out the names of stocks and use hand signals to indicate buy or sell.
Technology has streamlined investing and now allows anyone with an internet connection and bank account to get started without calling a broker. This tech boom also gave us auto investing. Through this service, a broker will automatically transfer money from your bank account and invest it in an exchange-traded fund (ETF) or mutual fund. Investors get to pick the transfer amount, frequency and the type of fund. While automatic investing isn’t required, it’s a popular choice for investors who want their portfolios to grow passively without much involvement on their end.
What are the Benefits of Auto Investing
It’s no secret why investors enjoy this feature. Automatic investing saves them time and allows their portfolios to grow seamlessly. It’s one less day to log into another account, look through your portfolio, find the fund you want to buy shares in and manually invest using cash in your bank account. You don’t have to remember to invest in your portfolio because it happens in the background.
Auto investing is more efficient, and it lets you tap into the benefits of investing as a whole. Investing can help you retire sooner, afford your next vacation, generate monthly cash flow and fulfill other objectives. Automatic investing helps you do those things consistently and turn investing into an effortless habit.
How to Auto Invest
If you’re ready to jump into the world of auto investing, you’re not alone. Most brokerage firms have this feature available because of how critical it is. However, you shouldn’t rush into auto investing right away. This feature has several advantages, but it’s important to do some legwork before getting started.
Consider Your Financial Goals
Investing can help you achieve financial goals, but identifying your goals and keeping them in mind can help you take an adequate level of risk. As people get closer to retirement, they focus on cash flow and low-risk assets. These investors could benefit from a mutual fund or ETF that emphasizes blue-chip dividend stocks. A growth fund or ETF could generate higher returns, but these funds also have more risk.
Investing in assets also decreases your cash position. This isn’t as much of a big deal for young investors, but older investors can draw into emergency funds to cover living expenses and anything else that comes up. Investors should consider how much cash they want to keep, how much they want to invest and the frequency of the auto investing feature. Many investors set weekly or monthly intervals.
Research Automated Investing Strategies
Investors can pick from several investing strategies. Typically, higher potential payoffs come with greater risk and volatility. Funds known for producing low returns aren’t as exciting, but people heading closer to retirement may prefer these types of choices. Reviewing your financial health and determining your risk tolerance in advance can help you take an appropriate amount of risk that aligns with your goals.
Set up Direct Deposit
Direct deposit allows you to move funds from your bank account to your investment portfolio. These direct deposits happen automatically at your direction. You can specify the frequency and dollar amount. If you need to take a break, you can pause direct deposits or lower the monthly contribution. You can also increase your direct deposit amount if you want to contribute more to your portfolio.
Choose an Automated Investing Service
Auto investing has many perks, but some services are better than others. You should look for services that offer several choices and low fees. Some auto investing choices have high fees that make it more difficult to accumulate capital gains. Funds that don’t require as much human supervision tend to cost less because fewer people are involved in the decision-making. You should also find criteria that match up with what you want as an investor.
Make Consistent Contributions
Your portfolio contributions are the only thing you can control. Investors can do research and put themselves in better positions to outperform the market or achieve their goals, but stocks can move in the opposite direction than you would like. Contributions let you grow your portfolio each month, and if your portfolio loses value, those monthly contributions will lower your cost basis. Some investors use a dollar-cost averaging strategy and buy on dips to reduce the break-even price.
Monitor Your Automated Investment Performance
Auto investing helps investors take a passive approach to investing. Their portfolios and automatic contributions do most of the work, but market conditions and personal goals can change. Investors should periodically check their portfolios and assess the market to determine whether they are still following the right course of action. These reviews will also help investors gauge whether their assets are performing as expected. Any fund can experience a short-term decline because of market conditions, but investors should look more into their investments if the drop is more than anticipated.
Adjust Your Strategy as Needed
No strategy is set in stone. Investors frequently change their strategies as they obtain new information, learn about alternatives and establish new financial goals. Most investors have lower risk tolerances as they get older because retirement is getting closer. While a long-term approach is healthy, investors should also monitor market conditions. The stock market and economy can change quickly and impact your holdings in the process. Swiftly responding can help you capitalize on short-term uptrends and minimize your exposure if dark clouds are on the horizon.
A Simpler Approach to Investing
Auto investing is an easy way to embrace investing and grow your portfolio. After doing some initial research, you can set up automatic transfers from your bank account. These funds can go into funds that align with your objectives. You won’t have to worry about remembering to invest each month because it will happen behind the scenes. Auto investing makes it easier to capitalize on the benefits investing provides. Your invested capital will compound over time and can help you transition into a smoother retirement when the time arrives.
Frequently Asked Questions
Is auto investing risky?
Auto investing carries risks similar to any investing strategy. Investors should look at the objectives of an auto investing service or fund before getting started.
Can you auto invest in stocks?
You can auto invest in stocks. You can set up bank account transfers that happen automatically.
How does auto invest work?
After connecting your bank account to a broker, you can have funds automatically go from your bank account to preselected stocks and funds. Once you set it up, it happens without your oversight, but you can change the frequency and contribution amount.
About Marc Guberti
Marc Guberti is an investing writer passionate about helping people learn more about money management, investing and finance. He has more than 10 years of writing experience focused on finance and digital marketing. His work has been published in U.S. News & World Report, USA Today, InvestorPlace and other publications.