Automatic investments may not be for every investor but they sure have helped me build my portfolio over the past couple of years. While I still make lump sum investments from time to time, automatic investments play a large role in building my portfolio of dividend stocks.
There are several advantages to using these types of plans, especially for smaller investors (like myself) who may not have the capital to invest using traditional methods. If you are a long term investor who is in the allocation phase of building a portfolio – then automatic investments may help you reach your goals.
Let’s take a look at what they are.
What Are Automatic Investment Plans?
Also known as an AIP, an automatic investment plan is a tool investors can use to slowly buy stocks on a recurring schedule. Most of the time, these plans are set up to withdraw small amounts of money from ones checking account and invest the capital into stock.
Investopedia defines an AIP as – “An investment program that allows investors to contribute small amounts of money, such as $20 a month in regular intervals.”
Advantages of Using Automatic Investment Plans
As I mentioned earlier, I have been using automatic investment plans for several years now to buy stock. Since I am a long term dividend investor, these types of plans help me buy shares in companies slowly overtime with small amounts of money.
Here are 5 advantages that I found using AIP’s – I am sure there are more you can add.
1 – Small Investment Amounts – While I would certainly love to have a couple thousand dollars available to invest every month, I just can’t make it work right now. However, I can manage to squeeze several hundred dollars out of my budget each month to invest in dividend stocks.
Instead of waiting to make a lump sum investment after saving for a couple of months, I try and take advantage of AIP’s now to get my money working sooner. While there could be some disadvantages to this approach, overall I find it a good strategy. I try and put small amounts of money to work for me each month by leveraging automatic investment plans.
You say you don’t even have $100 to invest? Check out – How to Invest in Dividend Stocks for as little as $10. There are options available to you to start investing with as little as $10 per month by starting an automatic investment plan!
2 – Dollar Cost Averaging – I personally have been burnt many times in past trying to time the stock market. I have often overpaid for stocks, which is why I really like the concept of dollar cost averaging.
The key to automatic investments is to contribute small amounts of money in regular intervals. So by investing small amounts each month, investors can “average” out their purchases to reflect the market value of the holding.
It is important to note that this strategy does not work for short term investments. However, it certainly fits with the strategy of building a long term dividend income portfolio.
3 – Save on Commission and Fees – In some cases (not all), setting up automatic investment plans can save on commissions and fees associated with buying stock. For example, some companies will cover all expenses and fees if you invest using their Direct Stock Purchase Plan (DSPP). There are also some brokers and 3rd party transfer agents who do not charge commissions if you enroll in an automatic investment plan.
I currently save on commissions every month by using automatic investment plans. I purchase shares in 3 stocks every month through Computershare, 4 stocks using LOYAL3, and another through a company run direct stock purchase plan.
If you are interested in finding out more about these plans, check out the article – Advantages of Direct Stock Purchase Plans.
4 – Pay Yourself First – Another advantage of using an AIP is that you can treat it like one of your monthly bills. Most personal finance experts will tell you the importance of paying yourself first every month. Automatic investments are a great tool to use to help accomplish this.
I pay myself first every month through my automatic monthly investments. At the time of this writing, I am treating these investments like a typical monthly bill payment. At the time of this writing, I automatically deduct $575 each month from my checking account and invest it into 8 different stocks. As I continually tweak my budget each month, I try and pay myself even more if money becomes available.
5 – Partial Shares – You say you want to invest in Google (GOOG) but don’t have $1,000+ to buy a single share? Well, setting up an automatic investment for shares of Google may be your solution. For example, you could set up a monthly investment plan with LOYAL3 and contribute $100 per month to buy shares of GOOG. This type of plan allows investors to purchase partial shares which benefits smaller investors. In this scenario, you would purchase about ~.10 shares of Google stock every month. After 11 or 12 months you could own that full share of stock.
I personally like the opportunity to invest in partial shares of stock to build my dividend income portfolio. It lets me diversify my monthly contributions across many different stocks. Otherwise, I would only be able to make lump sum investments in one stock each month instead of spreading my investments out.
Making small investments each month may not appeal to every investor, but they can certainly help some of us. I appreciate the fact that I can invest a couple hundred dollars every month in a variety of stocks – even if they are partial shares. As a result of automatic investment plans, I am taking advantage of dollar cost averaging – which is something that is important to me as a small investor. I am also keeping most of my commissions and fees low even with these plans.
Finally, I like the peace of mind knowing that overtime I will build a solid portfolio by paying myself first every month. While there are other ways to do this, automatic investment plans make it easy for me. In just the past 4 years, I have built a portfolio of stocks that is worth over $10,000 from my automatic purchases!
Do you leverage automatic investments plans? If so, what other advantages can you add to the list?