An automatic investment plan might include a workplace retirement plan like a 401(k), a robo advisor or automated portfolio, 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. Investors can direct money to be withdrawn from their paycheck or from a personal account on a biweekly basis, for example, and invested in a retirement portfolio.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 part of the growing trend around automating your personal finances.
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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
- Using a payment app that rounds up certain transaction amounts and deposits the difference into an investment portfolio automatically
- A dividend-reinvestment plan (DRIP) which helps investors reinvest their cash dividends automatically
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Types of Automated Investment Products
There are also different types of funds or 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 that acts more like an active investing portfolio. The securities and the allocation in each portfolio are generally fixed, but investors can typically choose from different portfolios that match their risk tolerance.
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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. But it depends. An automatic investment plan can also include automated funds or robo portfolios, as noted above.
If you consider automated investing 101, the basic architecture of almost all automatic investment plans is the use of technology to ensure the regular deposit of funds in a portfolio that reflects an investor’s needs and goals. While some people might view these options as “hands-off” or “set it and forget it” — and it’s true, they can remove or simplify a fair 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.
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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 helps to build wealth 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.
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.
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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 likely other options 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.
The financial landscape is evolving rapidly, as anyone who follows crypto or DeFi (decentralized finance) knows. The types of investments you can automate today will no doubt expand tomorrow.
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Is Automated Financial Planning Right for You?
In general, automatic investment plans are ideal for people who want to be on top of their finances, but may not have the time or the inclination for detailed investment management.
That said, automated investing isn’t a strategy for avoiding money management or financial planning completely. Most investors’ portfolios and plans include details, nuances, or circumstances that require human insight or input. Estate planning, owning a small business, or prioritizing among multiple goals, for example, can get complicated quickly.
Although it can be useful to automate some parts of the investing or financial planning process, a human advisor can help ensure that you aren’t missing anything.
Using an automated plan is not an excuse to lose track of your budget or your retirement plan. You’ll still need to keep enough money in your account to cover all of those automatic withdrawals, and that can be a challenge, especially if you work in the gig economy or if you aren’t paid consistently.
Fortunately, automation here can also work in your favor: You can set alerts to remind you when certain withdrawals are being made.
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Starting an Automatic Investment Plan
Starting an automatic investment plan is pretty straightforward. You first want to identify 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?
- 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?
- What are the fees?
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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.
Please understand that this information provided is general in nature and shouldn’t be construed as a recommendation or solicitation of any products offered by SoFi’s affiliates and subsidiaries. In addition, this information is by no means meant to provide investment or financial advice, nor is it intended to serve as the basis for any investment decision or recommendation to buy or sell any asset. Keep in mind that investing involves risk, and past performance of an asset never guarantees future results or returns. It’s important for investors to consider their specific financial needs, goals, and risk profile before making an investment decision.
The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. These links are provided for informational purposes and should not be viewed as an endorsement. No brands or products mentioned are affiliated with SoFi, nor do they endorse or sponsor this content.
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Communication of SoFi Wealth LLC an SEC Registered Investment Adviser. Information about SoFi Wealth’s advisory operations, services, and fees is set forth in SoFi Wealth’s current Form ADV Part 2 (Brochure), a copy of which is available upon request and at www.adviserinfo.sec.gov. Liz Young is a Registered Representative of SoFi Securities and Investment Advisor Representative of SoFi Wealth. Her ADV 2B is available at www.sofi.com/legal/adv.
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