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Successful investing over the long run is often characterized by a simple, habitual investment strategy. Time in market is a greater indicator for success than investment timing. Humans are inherently programmed to focus more on the here and now, so when it comes to finances, we should make it as easy as possible to invest for the future. This includes paying yourself first and living off the rest of your paycheck as well as automated investing. In this blog post, we’ll explore the benefits of automating your investing, the tools and platforms available, and how you can set up a foolproof investment plan for long-term financial success.
Table of Contents
Benefits of Investing Automatically
Take Your Time Back
If you invest currently and spend more time than you’d like investing, automating your investing can give that precious time back. You’ll still need to check your accounts, but hopefully much less frequently. To really kick your investing into high gear, you can take that time you save automating your investments and spend it earning more money.
Overcome Human Emotions and Urges
Like it or not, emotions can play a significant role in our investment decisions. By automating your investing, you are able to consistently execute your investment strategy without bringing emotions into the picture which often lead to impulsive, and often unprofitable, decisions.
Diversification, Risk Management, and Portfolio Rebalancing
Automated tools and robo-advisors make it easier than ever to:
- Diversify your portfolio across asset classes
- Implement dollar cost averaging (buying at multiple times to reduce price concentration risk)
- Rebalance your portfolio at predetermined intervals and triggers
These all lead to a well-balanced portfolio aligned with your risk tolerance and financial goals.
Cost Efficiency
Traditional investment methods can often come with the added burden of high fees, which is one of the biggest indicators of subpar returns (when compared to the S&P 500 or total stock market returns). Many automated solutions offer cost-effective solutions with lower management fees. All else being equal, this leads to greater returns over time.
Accessibility and Convenience
Automation makes investing accessible to a larger audience. Many have a low initial balance to start an account and offer user-friendly platforms, which makes it easy to get started.
Automated Investing Solutions
Robo-Advisors
There are many automated investing solutions to choose from with each having their pros and cons.
- Vanguard Digital Advisor
- I’m partial to Vanguard as they tend to have a great selections of ETFs/Index Funds and tend to have some of the lowest fees in the industry
- Pros
- Low-cost fees
- Great retirement planning tools
- Simple investing approach
- Company is investor owned
- Cons
- Minimum of $3,000 needed to get started
- No access to financial advisors
- Limited portfolio options
- SoFi Automated Investing
- Pros
- No annual advisory fee
- You only need $1 to get started
- Access to financial advisors at no additional cost
- Broad range of low-cost investments
- Automatic rebalancing
- Cons
- Limited time as an investment firm
- Limited account types
- SoFi ETFs are costlier than other options and may be included in your portfolio
- No tax-loss harvesting
- Pros
- Betterment
- Pros
- Low account minimum (currently $10 to get started)
- Competitive annual advisory fee
- Access to different portfolios for different goals
- Access to tax management features, including tax-loss harvesting
- Fractional shares allows all cash to be invested
- Cons
- Relatively high fee to access professional advice
- Emergency fund portfolio may hold too many stocks (higher risk)
- No direct indexing options
- Pros
- Wealthfront
- Pros
- Low ETF expense ratios and competitive advisory fee
- Daily tax-loss harvesting
- Automatic rebalancing
- DIY and automatic investing options
- Offers 529 college savings accounts
- Cons
- No access to human financial advisors
- The amount of options can be overwhelming
- No fractional share trading
- Pros
Automated Investing in a Traditional Brokerage Account
Most brokers offer some form of automated investing where you can setup a schedule for contributing funds to your account and for purchasing ETFs, stocks, index funds, etc. They don’t necessarily have all of the bells and whistles, but if you’d like a little more control over your account, this is a good option as well.
How I Automate My Investments
I don’t currently use any of the robo-advisors listed above, but have been toying with the idea of utilizing Vanguard’s Digital Advisor solution. I currently have an account with Vanguard where I primarily invest in low-cost ETFs and index funds.
How I do automate my investments, however, is by utilizing the automated funding and auto-invest feature on M1Finance. If you’re unfamiliar with M1Finance, they are a discount brokerage that allows you to buy fractional shares and create portfolios called “pies”. The pies can be made up of stocks, ETFs, and funds. In addition, you can just add or follow expert pies or model portfolios which simplify the investment experience even more. Your allocated percentage for each piece of the pie determines how the portfolio is automatically invested and rebalanced.
I have created a pie with stocks that I have higher conviction in over the long run and I believe will outperform the S&P 500 and NASDAQ. Each Monday, I have an automatic deposit of $50 to the account (if Monday is a holiday, it will invest on the next day). I have automatic investing enabled which means when the funds are deposited, M1Finance automatically invests that money in the pie, attempting to rebalance the pie during the buying process. What this means is that those $50 dollars go to the stocks that are below their allocation in the pie. I’ve been investing this way since March 2020 and have realized (at the time of this writing) ~87% money weighted return on investment (taken from M1’s calculations).
In addition to the taxable accounts, I also have contributions for a 401k and 457b automatically come out of each of my paychecks. My wife and I also manually contribute to Roth IRAs throughout each year.
Conclusion
Automating your investing is not a passing trend, it’s an easy and reliable way to fund your future. By embracing technology and leveraging automation platforms and tools, you can save time, reduce emotional decision-making, and enhance the overall performance of your investment portfolio. Take the first step towards financial success by exploring the diverse range of automated investment options available and start letting your money work smarter, not harder.
Do you automate your investing? If so, how do you do it? If not, get started today!