How automation can supercharge your investments
Amid all of the fuss about artificial intelligence (AI), it is important to remember that there are plenty of earlier innovations that actually have a far more proven track record of improving your investment returns.
One of the most powerful – and increasingly cheap and easy to implement – investment tools is to use automation to take a lot of the human frailties out of the art of investing.
The real bonus in adopting an automated approach is that it completely removes a layer of human intervention and procrastination which in this case is not helpful for investment returns and also gives full rein to the power of dollar cost averaging through systematic investments.
Automate an amount to save
By deciding on an investment amount that can be safely withdrawn weekly, fortnightly or monthly, your household budget can be liberated as well, with the routine of a regular amount being withdrawn and investing quickly becoming a routine.
It is a good idea to start small and to aim to raise the amount being saved over time as your circumstances and confidence in the strategy improve.
This way the decision of where and how much to invest starts to happen automatically but is obviously still open to being changed in either direction if required.
Over time the investment will grow surprisingly quickly and further decisions such as adding part of a pay rise to the amount invested can be made.
It is still obviously important to monitor the performance of the investment and make changes but using automation leaves a lot more time and bandwidth for you to consider changes if required.
A great way to tune out market noise
One of the great benefits of such a systematic and automated approach is that it removes you from the market noise around things such as interest rates, market moves and political changes.
Indeed, you can freely enjoy the benefits of dollar cost averaging at all times.
If the market is moving lower, you can be comforted by the fact that you are buying more with each automated transaction, hopefully setting you up for higher returns when markets revert to more normal conditions.
If the market is high and rising, the overall return on the portfolio will be up, which is a strong positive that reinforces the benefits of a consistent and automated investment system.
All told, the risks of market timing are reduced significantly by the consistent and automated purchase plan that reduces emotional biases.
How to do it
As I mentioned earlier, it is now easier and cheaper to start an automated investment plan than ever before.
Most broking platforms and also the direct ETF platforms now allow for very cheap and sometimes even free regular transactions that can be easily automated.
If you want to choose an index or a couple of indices (such as the ASX 200 and the S&P 500), there are plenty of ETF options that charge minimal management fees for getting a broad and diversified exposure to that market.
If you prefer a slightly more active approach, there are also pre-mixed ETFs that give exposure across a range of markets and are tailored for people with different risk tolerances.
Also, listed investment companies which also have very low fees and strong dividend performance can be an excellent option.
It is possible to set aside a certain dollar amount for each investment period (weekly, fortnightly or monthly) or you can also set up the system to buy a certain number of units if you would prefer.
As with all investment strategies, the sooner you start, the better the result.