A systematic investment plan, often referred to as "SIP," is a good way for people to put money toward their investments and spend more time on other things in life that matter to them. If you like the idea of putting your money to work for you in a way that you can set and then forget, this may be the system for you.
Putting your savings and investing on a set schedule also removes the potential for making poor choices about the timing of investments buys. Absolute market timing is rarely possible and often has more bad outcomes than good ones. There are too many unknowns that come into play when trying to find the best time to buy and sell stock, but buying shares of mutual funds with a SIP can have mighty long-term results. Here's why.
A SIP, also known as a "recurring" or "periodic" investment plan, is an automatic savings plan that can enable you to select a fixed dollar amount, or number of shares if buying stocks, mutual funds, or ETFs, and set how often you invest (for example, monthly or quarterly). A liquid account, such as a money market account or a bank savings account, is often used to fund the payments that are used to buy shares you choose.
For instance, you can set up a SIP so that every month, on a date you choose, the amount of money you allocate is put into a mutual fund of your choice. The dates for SIPs are often the 1st, 15th, or 30th of the month, but some allow for a day or date you choose. How flexible your date is will depend on 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 method that uses the regular and periodic purchase of shares. The strategic value of DCA is to reduce the overall cost per share of the investments. What's more, most DCA methods are started with an automatic buying schedule. This routine removes the potential for people to make poor choices based on a fickle reaction to stock market ups and downs.
SIPS and Behavioral Finance
Automating your savings and investment plans is a smart means of thwarting your worst enemy as an investor, which could be you. The personal finance subcategory of behavioral finance shows that certain human actions and negative feelings of greed and fear have more impact on how well your investments do than investment choice or asset allocation.
People often make their worst choices in the presence of strong feelings. For instance, when stock prices are soaring, and news headlines herald new records for stock indexes and an endless climate for profit, people tend to buy riskier assets, such as stocks and stock mutual funds. The opposite is also true. When stock prices have had a big fall for a long time, many people tend to sell their shares. This "buying high and selling low" habit is in direct contrast to wise investing.
A SIP removes the feeling from finance through buying shares of investments chosen in advance over time. This is done without regard for what is going on in the stock markets hour by hour or what the news media is saying.
How You Can Start a SIP
Most mutual fund companies, such as Fidelity and T. Rowe Price, offer SIPs. These plans are often simple to set up and can often be accessed online. Once you set up the SIP, you'll be ready to "set it and forget it" and focus on other things in your life that matter to you. Just don't forget about your SIP too much. Try to increase the SIP amount as often as you can. One great time to do so is when you get a pay increase. If you send your money to a SIP right from your bank account, you'll never even miss it and won't run the risk of spending it.