Savings What Is Systematic Investing and What Are the Benefits?

by Kate Ashford | March 06, 2023

About a year ago, Aimee Wells decided it was time to buckle down on savings.

Wells, a marketing consultant who lives in San Francisco, CA, set up regular, automatic contributions to both of her sons’ 529 college savings plans and her family trust and investment account. A consistent amount of money is transferred once a month, and the accounts have been growing steadily.

“It’s been a great thing to not have to worry about this,” Wells says. “You don’t even think about it or miss it when the money comes out automatically, and I can contribute additional funds on occasion as well.”

What is systematic investing?

With her method, Wells has stumbled onto systematic investing — setting up repeating contributions toward an investment account. You might set up an automatic withdrawal from your checking account once a month, for instance. The new funds may then be used to purchase a predetermined investment vehicle, such as a mutual fund, also in an automated fashion. Once it’s in place, the investing happens on a steady schedule — weekly or monthly, usually — until you cancel it.

Why is this helpful? “If you are given a choice to save or invest at the end of the month, you won’t do it,” says Cary Carbonaro, a financial professional in Huntington, NY, and author of The Money Queen’s Guide. “It’s human nature not to do it. Most of the world would have no money saved for retirement if they didn’t have an automatic retirement plan at work.”

In fact, the 401(k) plan is one of the best-known examples of this kind of investing. You pick the percentage of income you’d like to contribute, and then that percentage is pulled from your pay at regular intervals. You invest with every paycheck, systematically.

“I have clients who say, ‘I’m going to save $500 a month,’” says Ryan Fuchs of Lockton Retirement Services in Dallas, TX. “But then they forget, or they choose to spend it on something else. You want it to be as automated as possible.”

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.

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If you’re a younger investor, reinvesting dividends is the smartest thing you can do.
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Why does it work?

There are a few reasons systematic investing can be powerful. First, it lifts the temptation to “time” the market — to try to buy low and sell high. “Attempting to market-time is one of the ways that investors [may] lose money and have lower average returns over their lifetime, as no one has a crystal ball,” says Michelle Buonincontri, a Phoenix, AZ-based financial professional.

Instead, this approach results in so-called dollar cost averaging, in which you invest a fixed dollar amount in a given investment on a regular basis, regardless of its price at those intervals. “When the market drops, you’ll actually be buying more shares for the same dollar amount,” Genkin says. “And when the market goes up, it prevents you from buying too many expensive shares, which people are prone to do.”

Second, once you get started with systematic investing, you’re investing regularly until you make a change to your strategy. Even if you start small, getting started puts you ahead of the game. “Half of the battle, for a lot of people, especially when they’re young and just starting to work, is getting in the habit of saving,” Fuchs says. “If you can start setting money aside in your 20s, that money will likely end up turning into a large sum.”

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

Once you’re accustomed to saving regularly, it’s easier to bump up contributions as the size of your paychecks increases. The real value is your continued, regular investment over time. The sooner you start systematic investing, the more chance you have of securing financial stability in the future.

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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