Automatic investing: Building better financial habits

E*TRADE from Morgan Stanley

07/14/23

Summary: One way to build good financial habits is to automate your investments. While you cannot control the market or your returns, automatic investing may help reduce risks and help prevent emotional financial decision-making.

Woman going up an escalator.

Making decisions about how and when to invest can be intimidating, but automated investing plans may help minimize some of those fears.

Automatic investing plans—commonly referred to as AIPs—may also help investors grow their portfolios, stick to a budget, and take advantage of the power of compounding.

Automatic investing in a nutshell

Automatic investing tools allow you to set recurring contributions to an investment account, helping you to potentially build wealth overtime.

When you set up an automatic investing plan, you decide how much and how often to invest, and then the recurring investments are made for you. If your time horizon, risk tolerance, or goals change, you can easily review your plan and adjust as necessary.

Depending on the type of automatic investing plan you use, the funding for your investments may come from places like your paycheck, checking account, or savings account.

Why consider automatic investing?

Automating your regular investments can help reduce risks and keep some of the emotions of financial decision-making at bay.

This investment strategy also has the advantage of dollar-cost averaging. When you plan regular contributions to your portfolio, you are less tempted to try to time the market with reactionary investment choices. When you set the frequency of your investments, other factors like an asset's price won't influence your investing decisions. The result: dollar-cost averaging strategies of AIPs tend to minimize the effect of market volatility on your portfolio.

Automatic investing is a great tool to help you stick to a budget because the money automatically goes into your investment account. That means you are also less likely to use money budgeted for long-term investing in other ways, like spending it on a vacation. On the flip side: Don’t fall into the “set-it-and-forget-it” trap.

While AIPs allow you to put much of your investing on autopilot, you don’t want to be caught off-guard when unexpected expenses arise (e.g., car repair or medical bill). Check in on your investing plan if your budget is thrown off kilter and adjust if necessary.

Automating routine investing decisions can also help with your investment goals. You can check in on your portfolio periodically and make changes instead of constantly monitoring the market and assessing your financial situation each time you want to invest. An investment portfolio grows through both additional contributions and the power of compounding. With compounding, profit or interest may generate more profit or interest to create exponential growth.

What are some of the options?

There are several ways to use automatic investing plans.

  • You may already be taking advantage of automatic investing if you participate in a 401(k) plan with your employer.

    Employer 401(k) plans often deduct money from your paycheck and deposit it into your retirement account automatically, perhaps with matching funds from an employer. You choose your investing plan when you sign up for the 401(k) and then your investing is essentially put on cruise control.
  • You can also set up automatic investing plans on your own. One way is to use a robo-advisor with your brokerage firm. Robos build and manage your portfolio based on your risk tolerance to help keep you on track for long-term goals. While primarily a digital experience, some—like E*TRADE’s Core Portfolios—offer “hybrid" services, providing access to human support when you need it. 
  • Dividend reinvestment plans are another form of automatic investing. If the stocks in your portfolio pay dividends, you can choose to reinvest those dividends instead of taking the payouts.
  • E*TRADE also offers Automatic Investing, where you can set up recurring investments in eligible exchange-traded funds (ETFs) or mutual funds starting with $25. You can also choose Prebuilt Portfolios, a professionally built portfolio of leading mutual funds or ETFs.

With most automated investing plans, you can change the amount or timing of the withdrawals and investments or cancel contributions at any time with no penalty.

Bottom line: As you enjoy saving time with automatic investing tools, make it a regular habit to check in on your portfolio. Review your investing strategy and asset allocations, perhaps with the help of a financial advisor, to keep your investment choices aligned with your financial goals.

How can E*TRADE from Morgan Stanley help?

Automatic investing

Looking to build good financial habits? Consider setting up recurring investments in a retirement or brokerage account.

Core Portfolios

With Core Portfolios, we'll build, manage, and rebalance a diversified ETF portfolio for you. And we can help you invest in socially responsible companies too.

Brokerage account

Investing and trading account

Buy and sell stocks, ETFs, mutual funds, options, bonds, and more.

Premium Savings Account

NEW: Boost your savings with APY1

With rates 10X the national average2, plus FDIC protection up to $500,0003, and more.

Morgan Stanley Private Bank, Member FDIC.

What to read next...

Robo-advisors leveled the playing field and made professional money management more accessible to people regardless of their income or size of their portfolio. Here’s what you need to know.

Rebalancing your portfolio is an important factor when aiming to meet your financial goals.

With a handful of mega-cap stocks dominating the S&P 500, concentration could leave your portfolio vulnerable to potential losses.

Looking to expand your financial knowledge?