Savings What Is Automatic Investing and What Are the Benefits?

by Kate Ashford | July 24, 2023

An investment strategy that entails setting up payments to be routinely withdrawn from your checking account might sound like a questionable way to make money, but it’s actually a fairly straightforward financial strategy for creating wealth, and one that doesn’t depend on a lot of luck or magic. Here’s how it works.

With automatic investing, you’re continually putting money away for your retirement or other goals with certain amounts rather than every once in a while. Technology does the heavy lifting here so you aren’t the one making daily decisions. One way is to invest a certain sum in one or many investments that do not change. Another way is to use a robo advisor to monitor and periodically rebalance your investments in line with your risk tolerance, investment goals and time horizon.

Historically speaking, over time — not a few years, and certainly not a few months — the stock market indexes have increased in value (though past performance is no guarantee of future results). That’s why an automated investment program can be so valuable: Investors can be distracted by whatever’s going on in their lives and sometimes make financial choices powered by emotions, but with automatic investment programs, a person continues to invest. 

“It's all about dollar-cost averaging, an investment strategy in which you invest the same amount of money at regular intervals,” says Andre Jean-Pierre, a financial advisor and founder of Aces Advisors, LLC, in New York City. “This ensures you buy more shares when prices are low and fewer when prices are high. As a result, you sidestep the risk of making a sizeable investment when the market hits a sour note.”

When can you use automatic investing?

Often, when people talk about automatic investing, they’re referring to investing through mutual funds or an employer-sponsored retirement plan, such as a 401(k). The way it works: You decide what amount or percentage of your income you want to contribute, and then those funds are taken from each paycheck and diverted into your retirement accounts.

How much should you contribute? Most professionals recommend putting away 10% to 15% of your pre-tax income toward your retirement. If that feels unrealistic for you, start with a smaller amount, whether that’s 5% or 3% or 1%. One percent of your paycheck earmarked for retirement may sound like not enough to successfully fund your future, and it probably isn’t, but it’s far better than 0%, and if you can add another 1% every year, eventually you’d get to a good place.

“No two households are the same,” says Rui Yao, a professor in the Personal Financial Planning department at the University of Missouri and a CFP ®. “How much to save out of your current income requires a careful plan.” For instance, if you’re carrying a lot of high-interest debt, she says, you’d want to focus on paying that off rather than trying to put 10% of your income toward retirement. Meanwhile, if your employer matches contributions to your 401(k) plan, it’s a good idea to contribute enough to get the maximum match that your employer offers if you’re able to swing it, she adds. “You can’t get the maximum employer’s match and at the same time, default on the mortgage or rent,” Yao says, but if it’s doable for you, “an employer’s match is free money on the table — take it.”

A young woman uses her laptop to adjust her investments

Why does automatic investing work?

In essence, this strategy has historically worked because you’re only human, and an automatic investment program is not. You might make a mistake, such as forgetting to reinvest a dividend, or buying too high and selling too low. An automated system, such as a robo advisor, can automatically rebalance your account, selling investments that are too large and buying investments that have become too small.

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 will do just that, selling some stocks and buying some bonds to get the allocation back to your original settings. (Of course, changing your portfolio always brings the natural market risk of losses or gains to your investments.)

Granted, it’s not as exciting as it might be to pick the next hot stock to explode or to buy a million-dollar winning lottery ticket, but it can be a “get rich slowly” process that has historically worked for many people. Another plus is that, eventually, you may not even miss the amounts you’re routinely setting aside for retirement. “It may be difficult to get started to save and invest,” says Yao, “but once you have done it for a while, it becomes a new normal and you get used to it fairly quickly.” In fact, you could say it’ll become automatic.

 

— With additional reporting from Geoff Williams and the Life and Money by Citi editors.

Retired man using smartphone while sitting with dog in room at home

Investing Success Tips
Kate Ashford

is a New York-based writer whose work has appeared in Money, Parents and Forbes.com.

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