Should You Automate Your Investing?

Quick Answer

Automating your investments can be a strong financial move because it helps you stay consistent and build wealth over time. Examples of automated investing include contributing to a workplace retirement account and using a robo-advisor.

Man checking his investments online in his home office

From paying monthly bills to reordering household necessities, automating certain tasks usually makes life easier. The same can be said for investing. A set-it-and-forget-it approach might also help you save more for the future. According to a 2021 Principal Financial Group poll, 84% of workers who were automatically enrolled in their workplace retirement plan started saving for retirement sooner than if they had to enroll on their own.

There are several different ways to automate investing, but the common thread is that they can all help you stay on track to meet your financial goals.

What Is Automatic Investing?

Automatic investing simply means setting up automatic transfers into an investment account. That might be:

  • Contributing to a workplace retirement account, like a 401(k): These contributions are typically made through automatic payroll deductions.
  • Making automatic transfers from your checking account to an investment account: That might be a brokerage account or individual retirement account (IRA).
  • Working with a robo-advisor: This is an automated investment platform that chooses investments for you based on factors like your age and risk tolerance. Most robo-advisors will also rebalance your portfolio automatically.
  • Using an automatic investing app: Some will even round up your purchases from a linked debit or credit card and automatically invest the spare change.
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Pros and Cons of Automatic Investing

Before you make the leap into automatic investing, it's important to understand the positives and negatives of this method.

Pros of Automatic Investing

  • Saves time: Researching investments may require more time and energy than you're willing to give. There's also no guarantee that they'll perform as expected. Automatic investing allows you to take a more hands-off strategy. In most cases, you simply decide how much you want to contribute and how often. Just be sure to revisit your goals and asset allocation on an annual basis so you can course-correct as needed.
  • Can potentially grow your wealth over time: Investing early and often is the general rule. When you automate investing, it ensures that you're actively engaged and positioning your money to work harder for you over the long term. Dollar-cost averaging is a good example. This investing strategy has you invest a set dollar amount in regular intervals, regardless of what the market is doing. If you're contributing a set percentage of your paycheck to a 401(k), for example, you're already using dollar-cost averaging.
  • Avoids emotional investing: Sticking to your investment plan can feel hard when emotions are high. You may be tempted to cut your losses and pull your investments when there's a market dip. But since the mid-20th century, the S&P 500 has had an average annualized return of over 11%, according to J.P. Morgan. Emotions could also drive you to go all-in on certain investments when doing so isn't necessarily wise. Automatic investing keeps your emotions out of your portfolio so you can stay the course regardless of how you're feeling.
  • Safeguards your investment funds: Investing on your own requires you to manually move funds into an investment account. Having such easy access to those funds could put your wealth at risk. If you're feeling impulsive, you may be tempted to spend that money on other things. Life is hectic and you could also simply forget to transfer those dollars in a timely manner. Automatic investing does the heavy lifting for you and can safeguard your investment funds.

Cons of Automatic Investing

  • Risk of overdrawing your account: Contributions to a 401(k) are typically taken directly from your paycheck before it hits your bank account. When you automate investing in a brokerage account or IRA, those contributions will be withdrawn from your checking or savings account. You'll need to account for those transfers—otherwise you run the risk of overdrawing your account.
  • Forgetting to check on your investments: A balanced portfolio is one that reflects your risk tolerance, age and investment goals. However, your portfolio may drift away from your ideal asset allocation over time. The value of your investments will likely change, which could leave your portfolio either too risky or too conservative for your taste. That's why periodically rebalancing your investments is a good idea. With automatic investing, you may forget to revisit these things.
  • Lump-sum investing has its place: While automatic investing has its perks, there may be times when you have a large amount of money to invest. A cash windfall could come from an inheritance, work bonus or tax refund, for example. You can strategically invest this money in a variety of assets. Apart from that, you might also choose to use a chunk of cash savings to invest in something like real estate.

How to Automatically Invest

  1. Enroll in a workplace retirement plan. If an employer match is available, all the better.
  2. Look into direct deposit options. Your employer might allow a portion of your paycheck to be deposited into an investment account.
  3. Set up automatic transfers from your bank account. Simply choose the amount you want to transfer, along with the frequency.
  4. Consolidate investment accounts. If you have stray retirement accounts—like old 401(k)s from previous employers—consolidating them can make automatic investing easier because everything's in one place. You might roll these funds into a new 401(k) or IRA.
  5. Consider investing in exchange-traded funds (ETFs). With an ETF, your contributions go into a pool that the fund then uses to buy all kinds of investments. For example, a stock ETF may invest in hundreds of different stocks for you.
  6. Research actively managed mutual funds. A fund manager is at the helm of this type of account. They buy and sell fund holdings on behalf of investors with the goal of outperforming the market. That means investors don't need to make investment choices.

The Bottom Line

Automatic investing eliminates much of the legwork of investing. Instead of researching assets and potential returns, you can put things on autopilot. Your portfolio will still need your attention, but automating some investments might make your financial life a little easier. Connecting with a financial advisor can help provide clarity and ensure your investing strategy aligns with your goals.

It's also possible to automate other parts of your financial life. Free credit monitoring with Experian keeps an eye on your credit report and will alert you of any new activity. That can keep you up to date on your credit health and help you stop identity theft in its tracks.