Automatic investment to secure your future
Accumulating enough money to invest seems difficult. Rather than trying to find extra money every month to invest, many investors have found that they can accumulate funds more easily by having an amount taken out of their salary and investing it automatically every month.
SINGAPORE — Accumulating enough money to invest seems difficult. Rather than trying to find extra money every month to invest, many investors have found that they can accumulate funds more easily by having an amount taken out of their salary and investing it automatically every month.
Investment management firm Vanguard observed that if you figure you will invest whatever you have left at the end of each month, you'll probably find that "whatever" often translates to "nothing". It's easy to get distracted by urgent expenses, sales or something else.
The best way to make sure you start investing and preparing for the future is to have money taken out of your salary or bank account automatically and investing it before you ever get a chance to spend it.
Along with simplifying your life, "automatic investing" removes the pressure to decide when to make each investment and helps avoid the possibility that you will be too indecisive to do anything at all.
TAKING AWAY EMOTIONAL FACTORS
There are three key benefits of automatic investing, according to investment management firm T Rowe Price. First, it helps mitigate the effect that emotions may have on your financial plan. You contribute every month regardless of global events and sudden shifts in stock or bond prices.
Second, you pay yourself first, so there is no chance of forgetting to invest or accidentally using the money for something else.
And finally, systematic investing maximises the potential for compounded returns because you won't miss making contributions and can have dividends automatically re-invested.
DBS Bank similarly observed that a regular savings plan overcomes the hurdles of timing and emotions. The approach involves buying a fixed amount of investments every month, no matter how good or bad markets look. It takes the stress out of investing, because investors do not have to decide if a fund is expensive or whether market conditions are right.
Investment guru Dave Ramsey suggests setting aside 15 per cent of your income every month. The two main reasons for that level, he explains, are that it is low enough so you can have some income left over to save for your children's college fund and to pay off your home early, and it is large enough to provide for retirement.
If that percentage seems too high, figure out what you can afford and save that amount automatically instead.
GROWING MONEY OVER TIME
Once you decide to put money aside regularly, it's important to make a commitment to invest it according to a specific plan.
By using a monthly investment plan, you can focus on consistently saving and buying shares or bonds automatically every month in order to achieve your goals.
As Vanguard explains, "no matter what your goal is for the money you invest, you can get there faster by continuing to add to your portfolio on a regular basis. Making regular investments can help you stay on track and reach your goal faster".
Choosing the investments you want and deciding on your monthly investment amount also means that your work is already done every month, rather than having to decide how much to invest.
The regular investments can also smooth out price bumps and result in a lower average unit cost, DBS says, and allow you to use the "magic" of compounding to grow your nest egg to a sizable amount.
CHOOSING AN INVESTMENT PLAN
Once you start taking money out of your salary or bank account automatically every month, you'll need to figure out where to put it. The challenge, as writer Timothy Ho from investing website Dollars & Sense noted, is that it is easy to be intimidated when you have to commit money into investments and hear stories of other people losing large sums due to poor investment decisions.
Rather than just putting money into a savings account, using easy tools for allocating your funds can build them up more quickly.
One option is to use an investment plan from a bank or securities company. At POSB, for instance, consumers can invest S$100 or more a month in either Singapore bonds via the ABF Singapore Bond Index Fund or blue-chip stocks via the Nikko AM Singapore STI ETF, which tracks the performance of the Straits Times Index.
Maybank Kim Eng's Monthly Investment Plan enables you to choose a specific company's shares and set an amount to buy, then automatically purchase the shares every month.
An alternative is to use a "robo-adviser", such as Smartly, that allows you to assess your risk profile as well as your goals, and then have your money invested automatically based on your investing profile.
Smartly says that it leverages models and algorithms so you can invest in various exchange-traded funds (ETFs) based on your risk level, customise your portfolio and invest without any trading commission.
Another robo-adviser, Stashaway, says it builds a personalised financial plan and investment portfolio that reflects your goals as well as your personal preferences and that performs best in the current economic conditions.
While investing may seem hard, having money taken automatically from your salary or your account every month can start you on the way to a more comfortable retirement.
Starting early allows your funds to build up, too, using the power of compounding for a longer time.