How do I automate my investing?

A lot of us are familiar with making automatic payments for our credit cards, mortgages, netflix subscriptions etc. Well, this article is about automating the more fun side of your money – your investments. This is meant to be a 101 article on doing this and introducing some concepts and providing a framework for doing this. 

Automating your investments essentially indicates a passive investment strategy which I advocate for most average investors. Of course, you don’t want to do it blindly, but I do believe it can be a powerful way for you to remove/reduce any friction in generating wealth. Now, automating your investments are not really suitable for active investing and for those who prefer a more active form of investing, this is not for you. But if you are actively investing, then you probably enjoy doing it (and are hopefully making money from it) and so automating it sounds boring to you anyway. So what does automating your investments actually mean? Before we dig into that, let’s talk about a concept I talked about in my very first article on the 4 pillars of financial wellbeing. 

Pay yourself first

The foundation of automating your wealth is the concept of paying yourself first. What does this mean? It simply means instead of taking your paycheck and paying your bills first, you first need to pay yourself and then focus on paying your bills. You pay yourself first by investing your money first. The best way to do this without trying to make investment decisions every single week or month is to simply automate it. You remove the friction of trying to make a decision and just let it happen automatically. You have to believe in this principle for you to consider anything that I talk about in this article. If you don’t feel you make enough money to pay yourself first, then you need to consider exploring how to make more money or reduce your expenses so you have the ability to do this every single month. 

With that out of the way, let’s explore a few basic concepts that lie at the heart of automating your investing. 

Dollar cost averaging (DCA)

You can replace the word dollar with any currency – yen, rupee, Euro – you name it. When I first read about this – I felt like this was another one of those financial jargons for something very basic and simple. 🙂 Dollar cost averaging is simply the idea of investing a fixed amount of money in a regular cadence or time period (weekly, monthly, quarterly and so on). This is typically something you would do in a passive type of investment like investing in stocks, ETFs, REITs and so on. You invest this fixed amount of money irrespective of what is going on in the market – bull, bear, high low – it does not matter. You simply invest it every single week or month or whatever your time period. If you are an employee and invest in a retirement plan at work, you are already doing this. A certain portion of your paycheck goes into your retirement plan investments every single month. 

So what is the result of doing something like this? This is best explained using the example of buying a stock or an index fund. Let’s say you decide you want to invest $100 each month in a US S&P 500 index fund. Lets look at the below hypothetical example in this table. It shows the $100 investment over 5 periods. Hopefully in real life it’s not so volatile but for purposes of the example I am showing the price fluctuating each time period. 

So you can see, every month you invest the same $100 but depending on the price of the share, you get more shares or fewer shares. The math is simple but the behavior behind this is not. When the market is going down and you invest $100, most people see the value of that $100 go down and panic. And they stop investing. The way I see it (and the way I want you to see it too) is if the market goes down, you get to buy more shares! I see a flashing sign saying ‘Shares on sale’! On the other hand, when the market is up and share prices go up, you buy a lot fewer for the same $100. Then people suddenly feel the shares have become too expensive. And that’s not a reason for you to stop investing either. I know this can feel extremely difficult during recessionary times when the market is in a free fall, but I want you to have the discipline of doing this and assure you that your portfolio will be fine in the long run. 

So why am I saying to keep doing this? Well, assuming this is not some risky stock or cryptocurrency which is extremely volatile, you have to assume that in the long run, the value of all these shares will eventually go up. (Note: past performance of the stock market is not a guarantee of future performance but its the best information we have and the expectation is that it will go up in the long run. At least history seems to show that). Not only that, with time as your friend, the power of compounding will also kick in, growing your portfolio. 

So I want you to stop reading the news, stop following the market and just blindly invest whatever $ you wish to invest each week or month. Don’t even look at your portfolio for the next 20 years. After 20 years, you might be pleasantly surprised to see how nicely your portfolio has grown. Now when I say blindly invest, I simply mean – don’t try to time the market. You should not be blind about what you are investing in, or your asset allocation of course. The saying ‘time in the market is better than timing the market’ holds very true here. Today, dollar cost averaging is made extremely easy through apps and sites. Open any trading platform app and it will ask you whether you want to invest a fixed amount every month and it will simply debit your account and invest the money. It is so simple that you don’t even have to think about it after you set it up once. I personally do this for my 401K, Health Savings accounts and 529 accounts. 

DRIPs (Dividend Reinvestment Plan or Program)

Remember what I said about how the finance geeks really like their jargon? Well this one really takes the cake in my mind. Though on the top of the list for crazy finance jargon for my wife is the backdoor Roth IRA 🙂 But I digress. Let’s get back to DRIPs. A dividend reinvestment plan is very simply this – when you own shares or index funds or ETFs or REITs, they typically give you periodic payments called dividends. You can either choose to cash them out or reinvest them to buy more of the share or fund. Unless you have a specific need for the cash or feel you want to reinvest it elsewhere, I would say you should always reinvest the dividend back into the stock or fund. Why is that? Well, this is where you really let the power of compounding help you. So when you dollar cost average you are investing additional money to buy more of those shares. Well, you are doing the same here – except you are reinvesting the dividends to buy more shares. Typically these dividends will be smaller amounts paid out quarterly and you will buy a fraction of those shares. So allow the power of compounding to really do its magic here. What’s more, some companies may even offer you a discount on their shares if you choose to reinvest your dividends in their shares. 

When you combine dollar cost averaging and DRIPs, you have really set yourself up to supercharge your investments. Again, while the name sounds fancy and complicated, today the apps and sites make it extremely easy for you to do this. It’s a click of a button. I actually did not know about this for a long time. I kept going into my trading account every so often and manually reinvesting my dividends. I found out my Robinhood trading account allows me to do this with a click of a button and now my dividends get automatically reinvested.  Robo-advisors also do this automatically so you don’t even need to think about this if you use one of them. More on the robo-advisors in the next section.

Robo-advisors and rebalancing your portfolios

The final concept on automating your investments is around rebalancing your portfolio. Again, all this simply means is if you had decided on a certain asset allocation of say 80% stocks and 20% bonds and due to the changes in the market and the result of your dollar cost averaging/DRIPs etc, your asset allocation might change. Let’s say it has become 85% stocks and 15% bonds now due to stocks going up significantly. Well, at that point you will want to rebalance your portfolio by selling some shares and buying more bonds to get back to your 80-20 split. That sounds like a lot of work and even a bit stressful – right? Well, enter robo-advisors who do all this for you automatically. I talked about this in my article on investing in stocks. Today, you have different robo-advisors for trading accounts like Wealthfront, Betterment, Vanguard digital advisor and even ones for managing your 401K like Blooom. For a slightly extra fee (around 0.3% of your portfolio value) they take care of all of this. In my mind, this is totally worth it for the average investor. I use Blooom for my 401K and also have some money in wealthfront for a portion of my taxable brokerage account. 

Why automate? 

So let’s go back to the title of this article. Most of us are not geeks who love looking at our portfolios, trading accounts etc. and spend hours each month manually investing our money. In today’s age, it even seems laughable that anyone would do that. But for active investors who are very savvy and have specific investment goals in mind may choose to do that. For the average investor though, who simply does not wish to spend too much time or mind space doing this, automating your investments is the best way to grow your wealth. 

Ultimately, people get all worked up about wanting to invest in some great stock or investment and going after high returns. But let me tell the biggest open secret here – the single biggest thing that will generate wealth for most people is simply TIME. You need to allow your investments to grow over TIME. And since human nature craves instant gratification, this flies against the face of that. So the best way to get over that is to simply automate your investments, forget about it and do the things in your life that give you more joy. As the late investing legend Jack Bogle said –

“The winning formula for success in investing is owning the entire stock market through an index fund, and then doing nothing. Just stay the course.”

Jack Bogle

Thank you for reading and I wish you success in your financial journey.

Disclaimer: I am not a financial advisor and all the information in my articles are from my personal experience and are for informational and educational purposes only. Please consult with a financial advisor or CPA for professional advice.