Automatic Investing: Less Emotion, More Strategy

Why Automatic Investing?

When it comes to your long-term plan, consistent investing may be better—emotionally and financially. Regular investing in your accounts can be an important part of your overall financial plan.

“Automatic investing can help investors play defense when markets move,” says Kory. It can also help you stay the course and avoid costly mistakes. “Reacting may be one of the biggest threats to an investor’s financial strategy over the long term.”

Kyle agrees, “The right plan means an investor has already settled on the appropriate amount of risk and diversification for them. Adding an automatic investment means you don’t have to worry about how much or when to invest; it’s already been decided by your choices.” Here are other ways automatic investing may help.

1. Helps Investors Avoid Market Timing

Timing the market is trying to predict the best time to invest based on what you think markets will do. This behavior can include adjusting your portfolio in anticipation of market news, moving in and out of cash equivalents, such as money markets, due to uncertainty and/or stopping investments during a market decline.

Kyle says, “The bad news about market timing is that you must get out and get in the markets at the right time. So, you must be right twice.” And it rarely works, if at all. The good news about automatic investing is that you stay invested and can potentially take advantage of market movements (read more about dollar-cost averaging below).

As much as people know that long-term investing should not be about market timing and chasing performance (or avoiding losses)—many people still do it. Kory says, “Seeking performance may be potentially rewarding in good years, but it can also create heartburn in challenging years.”

2. Takes the Emotion Out of Investing.

When you set up and stick with an automatic investment plan, you won’t be as tempted to buy and sell based on headlines. And investing consistently over time may help you have more success. How? If you miss even a few of the market’s best days, your account balance might be lower than had you stayed invested the entire time (even through the worst days).

Emotions can have a significant impact on your investment decisions. In fact, studies on behavioral finance have provided evidence on the role emotions have on money choices. A pre-commitment strategy like setting up automatic investments can help you stay on course.

“Investors may not want to admit that they sometimes make emotional investing decisions,” says Kyle. “An automatic investment gives you a true strategy to make the most of your investment plan.”

“Otherwise,” he says, “You may just have a purchase strategy and buy things that don’t fit just because they sound exciting or try to unload others because they experience a downturn. In my opinion, it’s better to use the automatic investing strategy to help avoid those kinds of investment decisions.”

Kory says that a lot of it goes back to hearing bad headlines and making rash decisions based on them. “The majority of investors don’t have a systematic approach to reviewing their portfolios, so it’s understandable they would be moved by bad news.” Not having to be hyper-aware of what the markets are doing is another benefit of automatic investing.

Whether you have an automatic investing plan or not, reviewing your portfolio periodically can also help ease emotions. “It might be more beneficial to view evaluating your portfolio more like a doctor’s visit rather than a trip to the ER,” Kory says.

3. It’s Easier to Stick To Your Plan.

Retirement and other long-term goals require large amounts of money and a disciplined plan to get there. If you’ve ever calculated how much you might need for retirement or other long-term goals, you know that it’s best to start early and invest regularly.

“Why do 401(k)s and other workplace plans offer automatic deferrals from each paycheck to save for retirement?” asks Kyle. “Because it works. Automatic investing doesn’t guarantee that you’ll reach your ideal retirement amount, but it does provide a hassle-free way to save and stay committed to your future.” And it’s not selfish to make your future a priority.

Kory says people will be more diligent when they are caring for someone else, but it’s different when it’s about yourself. It’s the same when they are investing for their own futures.

“As individuals, we get relaxed in how we care for ourselves. It might help to think about your future self as someone you are responsible for. Automatic investing can be one way to care for yourself and keep your future a priority.”

4. Benefit From Dollar-Cost Averaging.

Instead of chasing (and hoping for) the best purchase price, consistent investing allows you to “collect” and average your purchase prices over time. This strategy, called dollar-cost averaging, helps you manage varying market conditions during your lifetime.

Suppose you invest $100 a month in a mutual fund and purchase shares at a variety of prices. At the end of the six months, you own 34 shares that cost $600 and your average cost per share was $17.65 per share ($600 divided by 34 shares).

But if you had invested the full $600 in the first month, you would have bought only 24 shares at $25 each. With dollar-cost averaging, you bought 10 more shares and reduced your cost per share by more than $7.

Of course, the opposite is true had you invested $600 at $12.50 per share. But over years of investing, it’s impossible to have perfect timing for every purchase.

“The good thing about dollar-cost averaging is it’s consistent investing. That consistency helps even out the high and low share prices while helping you stay invested for your future,” says Kory.

5. Build Investments Gradually Over Time.

Setting up automatic investments (monthly, or per pay period, for example) may help you build assets over time. Here’s why.

The more time you have for your money to grow and compound, the more likely you may be to reach your long-term goals. Compounding—earning money on your original investment and on any earnings for that investment—can have a powerful effect over time. And bumping up your contributions periodically (from annual pay raises, for example) may help build your assets even more.

^{Source: Future Value Calculator, American Century Investments, September 2024. These are hypothetical calculations contain assumptions that are intended for illustrative purposes only and ae not representative of the performance of any security. There is no assurance similar results can be achieved, and this information should not be relied upon as a specific recommendation to buy or sell securities. They assume a $2,500 initial investment and monthly investments over 40 years of $50, $100 and $200 with a 6% return rate. Assumes reinvestment of all gains, dividends and interest, and does not include fees, expenses or taxes. If all taxes, fees and expenses were reflected, the reported value would be lower.}

Kyle says, “Sometimes people don’t connect the dots between investing in a retirement plan at work or for college and that they are already automatically investing. I’ve had this very conversation with clients who saw a college savings plan for their kids grow significantly by investing regularly over several years. But when I mention investing regularly in an IRA, they say they don’t trust the markets enough to do that.”