Automatic Investing (Everything You Need To Know)
Let’s be honest. Nobody really loves managing their money. I’d rather be using my money, like by taking a food tour in Tokyo or a weekend ski trip with friends. Basically, I’m always on the lookout for ways to spend less time and get better results.
I’ve taken pains to research investments that don’t take lots of time to maintain and also pay off. That’s why I urge you to combine a classic low-cost investing strategy with automation.
What is Automatic Investing?
Automatic investing is not some revolutionary technique that I just invented. It’s a simple way of investing in low-cost funds that is recommended by Nobel Laureates, billionaire investors such as Warren Buffett, and most academics.
It involves spending most of your time choosing how your money will be distributed in your portfolio, then picking the investments (this actually takes the least amount of time), and finally automating your regular investments so you can sit and watch TV while growing your money. Hey, we’re lazy. We might as well embrace it and use it to our advantage.
Why Automatic Investing Works
Automatic investing works for two reasons:
Lower expenses. Nothing kills your investment performance more than expensive funds that invisibly drain your returns. Investing in them is especially crazy when you can earn better returns with lower fees. Why would you pay for the privilege of losing your money?
With automatic investing, you invest in low-cost funds—which replace worthless, expensive portfolio managers—and you save tens of thousands of dollars in trading fees, taxes incurred by frenetic trading, and overall investment expenses, thereby outperforming most investors.
It’s automatic. Automatic investing frees you from having to pay attention to the latest “hot stock” or micro-change in the market. You pick a simple investment plan that doesn’t involve any sexy stocks or guessing whether the market is going up or down, and then you set up automatic contributions to your investment accounts.
In this way, you effectively trick yourself into investing because it requires no work from you. This means you can focus on living your life—doing your job well, spending time with friends, traveling to different countries, eating at great restaurants—instead of worrying about your money.
I might well call this Zen Investing for People Who Have Real Lives. (And that is why I’ll never be a naming consultant.)
Is it Too Good to Be True?
The way I described automatic investing was basically the same as saying “Puppies are cute.” Nobody would ever disagree with it. Automatic investing sounds perfect, but what happens when the market goes down?
It’s not as easy to go along for the ride then. For example, I know several people who had automatic investment plans, and when the stock market incurred huge losses in late 2008, they immediately canceled their investments and took their money out of the market. Big mistake.
The test of a real automatic investor is not when things are going up, but when they are going down.
For example, in October 2018, the stock market dropped and one of my investment accounts decreased by more than $100,000. I did what I always do —kept investing, automatically, every single month.
It takes strength to know that you’re basically getting shares on sale—and, if you’re investing for the long term, the best time to make money is when everyone else is getting out of the market.
The Bottom Line
Automatic investing may not seem as sexy as trading in hedge funds and biotech stocks, but it works a lot better. Again, would you rather be sexy or rich?
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