When can you use systematic investing?
You can consider a systematic investing approach to work toward all sorts of money goals. For instance, as Wells did, you might want to set up an automatic monthly contribution to a child’s 529 plan.
“I have plenty of clients who don’t have the full $6,000 contribution for a Roth or a traditional IRA,” says Stephanie Genkin, a finance expert in Brooklyn, NY, and founder of My Financial Planner, LLC. “So, we figure out monthly what they can contribute, and set that up automatically. It’s really helpful for people who can invest a little bit of what they earn each month.”
It’s also the principle that applies to the reinvestment of dividends in your investments. In some accounts, you can choose to have dividends reinvested automatically, so you don’t have to decide what to do with those checks — it happens every time there’s a dividend paid. No decision is necessary. In Genkin’s opinion, “If you’re a younger investor, reinvesting dividends is the smartest thing you can do. That’s where compounding happens, and over time, your money is making exponentially more money.”
Further, you can have your accounts automatically rebalanced at regular intervals, selling the investments that have gotten too large in your account and buying more of the investment class that’s gotten smaller.
For instance, if you originally set your 401(k) contributions to 70% stocks and 30% bonds, you might find after a year that your account looks more like 75% stocks and 25% bonds. If you’ve set everything to automatically rebalance, your portfolio would sell some stocks and buy some bonds to get the allocation back to your original settings.
“A lot of people never rebalance,” Carbonaro says. She often advises her clients to consider the practice annually.
Of course, the strategy need not apply only to expanding your investments; arranging a weekly transfer to a savings account simply to beef up your emergency fund is another example of taking an automated approach to building up your financial holdings.