Automated Investing – Your Hidden Helper

investing forcedPay yourself first.

That’s the advice from many finance gurus.

It’s even written about in legendary books like “The Richest Man in Babylon”.

By the way that’s a great book you should definitely read!

The main message is: A part of all you earn is yours to keep.

My take away is… make saving and investing your number one priority!

 

The Issue…

For many people, this just doesn’t happen.  They want to.  They need to.  And they intend to…. but it just never actually happens!

Either you’re a saver, or you’re not.  Most of the time, you’re one or the other.

As I was saying the other week in my Rent vs Buy article, some people just cannot save without being ‘forced’ to save.  Not with a gun to their head.  But with a simple commitment that they forget about, like a mortgage or their superannuation.

The prime reason that superannuation and home-ownership work so well at building wealth over the long term, is that people really don’t need to ‘do’ anything.

A part of their pay is taken and invested into their Superannuation Fund for the next few decades of their life.

And the mortgage just comes out of their bank every week/month/year.

As a result, both of these automatic payments improves their financial situation in little increments, without any effort.

 

Forced Investing

While some people (like myself) can’t wait to get spare cash invested, for many would-be savers, they never quite get there.

Since it works so well for home-owners and Superannuation, let’s apply the same principle to our investing.

I call it Forced Investing.

This is the next step to take after all personal loans, car loans etc, have been totally paid off.

If you’re someone who would like to save more, or wants to invest but never gets there, this is for you.

Login to your online banking right now.

Next, setup a direct debit, from your account into your ‘investment’ account.

This may be an account you have with Vanguard, if you’re taking the Index Fund approach with them handling your money.

Alternatively, it may be your Stockbroking account, if you’re buying LICs or the ETF version of your Vanguard Index Fund.

If you don’t have a Stockbroking account, you can find out from your bank if they offer one.  Most do.

Truthfully, there’s not a lot of difference between the online share brokers.  So make sure you find one with very low fees!

I have an account with CMC Markets which is cheap and easy to use.  But lately, I’ve been using SelfWealth* because it’s even cheaper!  And it has a fixed fee, meaning they charge the same low fee no matter how big the trade is!

 

Commit

Most importantly, make it a regular thing.  Every time you get paid, make sure some of it is sucked away before you can get to it.

Setup an automatic withdrawal form your bank every week, fortnight or month – whichever works for you.  But just do it!

For now, it doesn’t matter how much it is, just set the damn thing up and start investing.

This is a non-negotiable Strong Money habit!

While many readers are probably already investing regularly, it can’t be understated how important it is.

Maybe you already have a sweet version of Automated Investing on the go, but maybe we can improve it.

 

Incremental Improvements

I came across this concept recently, from fellow blogger Miss Balance, over at All About Balance.  It applied to her savings rate, but I’m gonna steal it and apply it to Automated Investing!

Let’s say we’ve got a direct debit of $1000 per month going into our Stockbroking account*, to buy shares in our chosen LIC (listed investment company or ETF (exchange-traded fund).

How hard would it be to increase this by $10, to $1010?  Probably not very hard.

Almost all of us could find an extra $10 a month, even the beastly super-savers!

After a month or two, we can increase our automated investment to $1020.  Another month or two later, we can increase it to $1030.  You get the picture!

Because we won’t even notice the money is gone, this strategy is bound to work for those just starting out on their early retirement journey.

Since it will be automated, we will likely manage just fine without the extra $10 each month.

Maybe you can even play a little game… see if you can invest extra this month, more than you’ve ever invested before in a single month.  See if you can beat your own record!

 

Dividend Reinvestment Plans (DRPs)

So, you’ve saved some money and bought some shares in a low-cost LIC or Index Fund.  Awesome!

In the not too distant future, there will be some cash payments coming your way, in the form of dividends.

Now, you’ll receive some paperwork in the mail, asking you if you want to participate in the Dividend Reinvestment Plan (DRP).

Essentially, they’re asking you if you want to receive your dividend in cash, or if you’d like to reinvest it and receive more shares instead.

To automate your investing even more, you can tick the box and send it back.  Now you’ll be receiving more shares every time a dividend is paid, instead of cash.

The best part about this is… you don’t have to do anything!

You now own more shares, which means a larger dividend.  But since you ticked that DRP box, you’ll receive a larger amount of shares this time, instead of your dividend!

Each time, the amount of shares you receive, will get larger.  The amount of shares you own, keeps increasing and you can switch back to receiving the dividends in cash again, any time you like.

Personally, I take the dividend in cash and combine it with my savings to buy my next parcel of shares.  I just prefer it this way, since it gives me more control over where I’m investing my money each time.  But the DRP approach is a winner for true set and forget automated investing!

 

Dollar Cost Averaging

Another great thing about Automated Investing into the sharemarket, is you don’t have to worry about share prices.

If you commit to investing a set amount every month, your purchase prices will average out nicely over time.

This is called Dollar Cost Averaging.

Your money will stretch further and buy more shares when the market is low.  And if the market is high, your money will purchase fewer shares, giving an averaging effect.

The investor who is buying regularly, regardless of market conditions, is likely to be the most successful investor!

 

Buying Up Big

As time goes on, a funny thing will start to happen.

When you’re receiving cash dividends every 6 months, combined with your monthly savings, you’ll be buying pretty large chunks of shares!

Owning shares in a LIC or an index fund, will give you a slice of ownership in a huge spread of businesses.

Over time, as these companies prosper and their earnings increase, the dividends you’ll be paid will become larger and larger.  This then allows you to buy even larger stakes in these investments.

It’s the finest form of compounding.

 

Don’t Wait

Please, whatever you do, just start investing!

Don’t wait for the perfect time, till you’ve got more money or till you find the perfect investment.

There’s always a reason to put it off… find a reason to not put it off!

Just start!  You’ll learn plenty as you go, and then you can invest more as you feel more comfortable.

Yes, it may seem boring at first.  The numbers may seem small.  Don’t be discouraged.  Everyone starts somewhere… just bloody start!

Setup a direct debit now, into your ‘investment’ account, and commit to investing it, when the balance reaches $1000 or $2000.

Make it a habit, like brushing your teeth.  You don’t think about it.  You just do it.

Your goal is to be an investing robot 🙂

 

The Money Factory

I’ve really grown to love investing in shares, despite being a enthusiastic property investor only a few years ago.

What can I say, there’s not many things greater than saving, investing and receiving ever-increasing amounts of cash to your account in the form of dividend payments.

Possibly the wealthiest man in history, John D. Rockefeller famously stated, “Do you know the only thing that gives me pleasure? It’s to see my dividends coming in.”

It’s like having your own money factory!

The machines hum with productivity.  The parts rattle and the cogs turn.  At the end of the money production line, there is a big skip bin.  The money fills up the skip bin slowly.  And every 6 months or so, that skip bin is dumped on my lawn, for me to roll around in…

investing rewards

 

Sorry, drifted off there for a minute 😉

Where were we?

Ahh yes, building your own money factory…

Starting out, the numbers are small.  But over time, the big basket of companies you own in your index fund or LIC, will earn increasing amounts of cash, a fair amount of which, will be passed on to you in the form of dividends.

And why shouldn’t it be?  You’re the part-owner of those businesses after all!

With every automated payment into your investment account and share purchase, you are less reliant on your job.

 

Compounding On Steroids

Probably the most motivating way to think about regular investing is this…

— Every time you purchase shares, your dividend income will increase.

— Every time you use your dividends to buy more shares, your dividend income will increase.

— And every time the underlying companies increase their dividends, your dividend income will increase.

This is what I call:  The Relentless Progress of a Dividend Investor.

Ultimately, your income will compound and grow over time, due to all these factors.  Best part of all is, you can set it up so it’s basically happening automatically.

Finally, investing like a robot is a great strategy.  Because truthfully, the most dangerous thing in investing, is human behaviour.

So go and automate your investment plan!  And then celebrate, because the hardest part is done.

Your future self will thank you!

 

*Get 5 free trades when you signup with SelfWealth using my referral link.  (I’ll receive 5 free trades too, so thanks!)  Also, I found a PDF version of The Richest Man In Babylon, which I highly recommend you read.  You can find it here.

24 comments

  1. Thanks for the shout out! Incremental Improvements will mean I have an extra 12% of my take home pay invested this year which is awesome and doesn’t hurt a bit.
    It is a great idea to treat investing as a ‘forced’ part of your budget rather than hoping there is something left at the end.

    1. No worries, thanks for the idea 😉
      Spot on, it should be non-negotiable… this is an early retirement blog after all, not a do-what-you-feel-like blog!

  2. I totally agree “forced investing”is the best way to do it. The best way to get started and develop a habit for success.

  3. Have neglected my finances for a while and this is just the blog I needed to get on track again – thank you so much for sharing useful, actionable and bite-sized information! I have a perhaps silly question though – when you automatically transfer funds every month to CMC markets ‘investment’ account, you’ll have to log in every month to buy more shares or can that be automatically set up as well?

    1. Hi Mel, thanks for stopping by! Glad to hear this article helped you out 🙂

      Yes, after the auto transfer to your stockbroking account, you’ll still need to make the purchase manually. The main thing is the money gets there in the first place – as opposed to being spent, had we not setup the auto transfer!

      If you are looking for an automatic transfer style set-and-forget investment, check out opening an account with Vanguard. You can open an Aussie or International index fund account with $5k, and then Bpay any amount over $100 after that, whenever you like. Fees are a little higher, but it’s a great way to go about automating your investments. Check it out here – Vanguard Aussie Index – Retail Managed Fund.

      Hope that helps, and thanks for reading!

  4. I have ticked the YES box in all my DRP plans in Lics…

    have been thinking whether its better to receive dividends in cash and reinvest the cash myself…but I have noticed that IF I receive the dividend in cash, I have the tendency to try to time the market…. and never act as I’m always waiting for a better price and most of time, I will just end up buying shares at a price higher than the DRP price.

    so I will receive my dividend, then I will be holding onto the cash and thinking, the market doesnt look cheap, I should wait for bargains…then the market just goes up higher and I never pull the trigger……. which is not a very good way to invest

    I find it Very hard to pull the trigger when I receive my dividends in cash, so although DRP can sometimes mean you will buy when the market is expensive, its better than just holding onto the cash.

    1. In that case, the DRP sounds like an excellent move. It can protect us from ourselves, and sometimes there’s a discount for reinvesting too.

      I just buy every month since there’s no way of knowing if prices are going to be higher or lower next month. To me, I prefer the regular habit of buying as a far easier approach than trying to time it.

      The problem is, the market can remain expensive for a very long time. Or it can look expensive, but earnings grow strongly to justify the valuations. We simply can’t know what’s going to happen. I firmly believe regular buying will provide the best result with the minimum of effort!

  5. Hi Dave,
    Love this post. Wish there’s some software that can automate my investments in ETC and LICs so human factors do not come into play.

    1) So do you just buy every month regardless of the NAV or the price, essentially just DCA and not value cost average? Do you set a particular date each month?
    2) Do you buy through a discretionary trust with a corporate trustee?

    1. Thanks, glad you like it!

      There’s always the option of Bpaying every month into the Vanguard Australian Shares index fund by setting up an account with them and an automatic bpay? The fees are higher but is simpler and would suit some people better.

      As for me, yes I buy almost every month and dollar-cost average. It has varied lately due to property bills (ironically) but usually it was end of month – no special reason.

      We buy in personal names, no fancy structures.

      1. Human nature always tend to creep in. I find myself when purchasing the shares, looking at who and how much is on sale and dictating a price limit to buy at – even if it’s a few cents lower. And shares may not be purchased for 1+mth where nobody sells.

        SMA – are you placing orders with the highest bid on that particular day and Be sure you are top of List?

        1. Hey Toast. The stuff I buy (mostly old LICs and VAS) have lots of liquidity so a market order is fine, or a limit order a few cents above the current price. I don’t worry about it too much. Not going to matter over the next 50 years whether I got it a couple cents cheaper or not, just not worth worrying about to me.

  6. Hi Dave,

    I have just signed up with your referral link to Self Wealth. There was an option to bring across all existing holdings using HIN. I took this option but am not sure if its best to keep my existing holdings in my previous ANZ share registry and just use Self Wealth for purchasing new stocks. This is because ANZ provide Tax Summary reports that detail total income (franking, credit, DRPs) in one place, which will make Tax time much simpler. Is it better to have both or consolidate into one in your opinion?

    1. Hey Dano. Good question. There’s no right answer really, whichever you prefer. Having it in one place is simpler in a way, but that’s a pretty good feature with ANZ, especially if it shows franking credits etc. But if you’ve already chosen the transfer option, it may be too late to stop the transfer of holdings?

      You’ll have to get used to keeping track of the new ones in any case, as Selfwealth doesn’t track income/franking. I put all my trades into a Sharesight account which is free up to 10 holdings, tax is done with one report and also can run tax reports if you ever sell holdings too. Link is here if you’re interested.

  7. A late query on your “robot” topic: have you looked at “robot-advisers” eg Six Park, or InvestSmart etc whereby you self-describe your risk profile and leave it to them to construct a portfolio to match. Your views, as ever, would be interesting and, no doubt, valuable.

    1. Hey Charles. I’ve only really looked at Six Park and it looks like a pretty good option for long term set-and-forget investing. Definitely very hands-off and convenient too. Thumbs up 🙂

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