According to the Oxford dictionary, the word “Automatic” means “Working by itself with little or no human control”
What I love about this definition is specifically the phrase “With little or no human control”.
Here at FPS, we utilize automation where possible for ordinary non complicated tasks. One area that comes to mind is our scheduling software. It allows you to click on a link and see our calendars and pick a time that works best for you. In the past, it meant several emails back and forth with, “how is Tuesday the 3rd at 3pm?”. “No, that doesn’t work, how about…..”
So, how does automation tie in with the title of this blog?
In the best of times, automatic investment plans work well. In times like we are experiencing now, they can work really well. Why? Simply because when one invests regularly (each month for example), they are putting their money into an investment that could be up or down at that given moment.
In periods when investment accounts are going down, (like we have experienced in 2022 so far) when we invest during those down periods, and we hold our investments for a long time, we are taking advantage of something called Dollar Cost Averaging.
Check out a similar blog, “Lump Sum to Invest” https://planwithfps.com/blog/lump-sum-to-invest to see how this works.
But for now, the reason I bring this up is, we can be our own worse enemies. Logically, we all know it is better to buy things on sale. Whether that is a pair of shoes, tuna fish, or investments. BUT, we have to factor in the emotional, human component.
If for example, let’s say your investment account is down 10% this year. As a comparison, the S & P 500 (the 500 largest companies in the US) happens to be down about 12% this year as of the time of this writing.
Logically, you could say, “Seems like a good time to invest. The market is down, and I don’t need this money for many years.” But then that emotional part of your brain comes back with, “Yeah, but what if it goes lower?”
That is where the automation comes in and it does a beautiful job. If you have a retirement plan at work, you are doing this now. Money comes out of your paycheck each pay period and goes directly into your retirement plan.
Nothing to think about, remember to do, or have second thoughts about. It works beautifully.
Now, when might automatic investing not be a good idea?
1. Your expenses exceed your income
If you are just getting by, have a lot in the way of consumer debt such as credit cards, student loans, a car payment etc, it might be best to get that under control before committing to an investment plan. Investing sure seems more exciting than paying off a credit card however, if you are paying 18% on a credit card, paying that off is like getting an 18% return. Way better than putting it in an investment account in my opinion.
2. Your risk tolerance is extremely low
If even the slightest short-term loss causes you to toss and turn or otherwise produce much anxiety, you must look hard at whether you should be investing. (Or changing your investment strategy). I strongly recommend you speak with your financial advisor (If you are working with one and if not, maybe establish that relationship) to get a good handle on much risk you are comfortable with. By the way, most people think of the word “risk” as loss of principal. There is another risk. Loss of purchasing power (also known as inflation). If your money is not keeping pace with inflation, the $5.00 loaf of bread today might cost $9.00 or more twenty years from now. Without a proper investment plan, you may be in trouble.
3. You have a lump sum to invest
Check out the link above “Lump Sum to Invest” to learn more.
4. You don’t need to invest
Many years ago, a very nice older woman came to see me. We will call her Felicity.* She had with her a three ring binder that looked like it weighed 10 lbs.
She had gone to one of those large Wall St firms that put together an investment plan for her.
She didn’t feel comfortable investing her money into what they presented. The binder was chock full of individual stocks, limited partnerships, bonds, and other things that were hard to decipher.
I closed the binder and asked her some questions. About her lifestyle, her current expenses, upcoming expenses, and her sources of income. Felicity lived simply. In fact, she met all her expenses with her Social Security and small pension.
Her money was currently sitting in MANY different banks. Mostly in CD’s and if I remember correctly, was well in excess of $2,000,000.
Here’s the thing. When I asked her what she would like to see happen to the money when she was gone, without hesitation she told me she wanted it to go to her two kids equally.
Felicity didn’t need an investment plan. She needed an Estate Plan. To help ensure her money went to her kids in the most efficient way, incurred the least amount of taxes, legal fees, or court involvement. She didn't need to get a better return.
The bottom line is, everyone is different. Your coworker doesn’t have the same risk tolerance as you. Doesn’t have the same expenses and income or even goals. if one has a good comprehensive financial and investment plan, you are halfway there.
P.S. Investing automatically doesn’t really have to be “Investing”. It could be “Saving” automatically. We have helped many over the years save for things like a house. When one has a short time horizon for a goal where 100% of the money is going to that goal at once (Like buying a house), investing isn’t really an option as it carries too much short-term risk for these types of goals. But, a systematic and automatic savings plan works great as well.
Lastly, don't forget, investing carries risks. You can lose money and it is highly recommended you work with a professional so you understand these risks fully before investing.
Feel free to reach out to me if you have any questions. I’m here to help.
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All the best.
Rick Fingerman, CFP®, CDFA™, CCPS®
*Not her real name
Financial Planning Solutions, LLC (FPS) is a Registered Investment Advisor. Financial Planning Solutions, LLC (FPS) provides this blog for informational and educational purposes only. Nothing in this blog should be considered investment, tax, or legal advice. FPS only renders personalized advice to each client. Information herein includes opinions and source information that is believed to be reliable. However, such information may not be independently verified by FPS. Please see important disclosures link at the bottom of this page.