TSI #20: How to put your investment strategy on autopilot.
Nov 06, 2022Hello Stoic Investors,
Today I want to focus on how you can improve your investment results by harnessing the power of automation.
A famous behavioral economist Richard Thaler once said:
"The lesson from behavioral economics is that people only save if it's automatic."
I strongly believe that this applies to all money-related subjects.
If you have a busy life between your job, family and passions, chances are, you can't find the right time to put your money to work.
Instead of consistently investing a fixed sum of money every month, you're skipping months. Maybe even years.
By doing that, you're leaving money on the table.
Let’s make an example.
$500 invested per month for 35 years will make you a millionaire. Your portfolio would be approximately $1,699,396 if we assume a 10% average return.
In this example, you are investing $6,000 per year divided as $500 every month.
Let’s say that you’re too busy making it a habit and are therefore investing on an annual basis.
If you are investing $6,000 every year, even if your total contributions are the same,
your portfolio would grow into $1,626,146. You would end up with $73,250 less.
Would you leave that kind of money on the street if you had a chance to grab it with minimal effort?
A simple way to avoid this mistake is by automating your investments.
Nearly every available investment account offering provides investors with the option to make automatic investments. Take advantage of that.
The logic is simple.
- Firstly, automate monthly money deposits from your bank account to your broker.
- Secondly, automate monthly investments with your broker (where your investment account is held).
This "Automatic Investment Plan (AIP)" ensures you are always paying yourself first. A huge benefit arises from that.
In this way, your investments are treated as another part of your regular budget, which ensures you're not skipping the monthly deposits.
Because the system is now automated, you're also not tempted to spend everything you earn.
Pro tip: The date of your automated deposit should be the date you're being paid a salary. This ensures you're not skipping any months due to "unexpected" spending.
An automatic investment plan is one of the best ways to invest and multiply your money.
It pairs super well with index investing. Especially if you're building wealth for the long run.
So, note down these points and automate your investments today:
- Inconsistent investing = money left on the table
- Instead, pay yourself first and your future self will thank you
