A systematic investment plan is a good way for investors to automatically contribute to their investments and spend more time on other priorities in life. Set it and forget it!
Automating your savings and investing also removes the potential for making poor decisions about the timing of purchases. Absolute market timing is rarely a good idea and often has more negative consequences than good ones.
But buying shares of mutual funds with a systematic investment plan can have powerful long-term results. Here's why.
A systematic investment plan, also known as a SIP, a recurring investment plan, or periodic investment plan, is an automatic savings strategy that allows an individual to select a fixed dollar amount (or a fixed number of shares if using investment securities, such as stocks, mutual funds, or ETFs) and to choose a set frequency of deposit or investment, such as monthly or quarterly. A liquid account, such as a money market account or a bank savings account, is usually used to fund the payments that then go buy shares of the selected investment type.
For example, you can set up a SIP so that every month on a specified date, an amount you choose is invested in a mutual fund of your choice. The dates for SIPs are often the 1st, 15th, or 30th of the month but can sometimes be any specified day or date, depending upon the mutual fund company or brokerage firm's rules for SIPs.
Dollar-Cost Averaging and SIPs
Systematic investing is a key aspect of dollar-cost averaging (DCA), which is an investment strategy that implements the regular and periodic purchasing of investment shares. The strategic value of DCA is to reduce the overall cost per share of the investments. Additionally, most DCA strategies are established with an automatic purchasing schedule. This automation removes the potential for the investor to make poor decisions based upon an emotional reaction to market fluctuations.
The Psychology of SIPS: Smart Investing Behaviors
Automating your savings and investment plans is an effective means of overcoming your worst enemy as an investor—YOU! The personal finance sub-category, behavioral finance, demonstrates that human behavior (such as the potentially self-destructive emotions of greed, fear, and complacency) can have more impact on an investment portfolio's performance than investment selection or asset allocation.
Investors often make their worst decisions in the presence of extreme emotion. For example, when stock prices are soaring and news headlines herald new records on stock indexes and a seemingly endless environment for profit, investors tend to buy more risky assets, such as stocks and stock mutual funds. The opposite is also true. When stock prices have dramatically fallen for an extended period of time, many investors tend to sell their shares. This "buying high and selling low" habit is in direct contrast to wise investing.
A systematic investment plan removes the emotion from investing by purchasing shares of investments periodically, regardless of what is happening in financial markets or what the news media is saying.
How You Can Establish a Systematic Investment Plan
Most mutual fund companies, such as Vanguard Investments, Fidelity, and T. Rowe Price, offer SIPs. These plans are often simple to establish and can usually be requested online. Once you set up the SIP, you'll be ready to "set it and forget it" and focus on other priorities in your life. Just don't completely forget it. Try to increase the SIP amount whenever possible, especially after pay increases.