What Is an Automatic Investment Plan (AIP)?
An automatic investment plan (AIP) is an investment program that allows investors to contribute money to an investment account at regular intervals to be invested in a pre-set strategy or portfolio. Funds can be automatically deducted from an individual's paycheck or paid out from a personal account.
Key Takeaways
- An automatic investment plan (AIP) refers to any number of strategies whereby investments are made using funds automatically diverted for such purposes.
- Many pension funds are automatically invested with pretax dollars or money matched by employers.
- Individuals can also structure AIPs on their own, from simple dividend reinvestment plans to fully automated roboadvisors.
Understanding Automatic Investment Plans (AIPs)
An automatic investment plan is one of the best ways to save money. Numerous market mechanisms have been devised to help facilitate automatic investment plans. Investors can contribute through their employer by scheduling automatic deductions from their paycheck for investment in employer-sponsored investment accounts. Individuals can also choose to set up automatic withdrawals from a personal account.
Employer-Sponsored Automatic Investment Plans
Employers offer various options for automatic investing through their benefits programs. Investment options help to support both short-term and long-term investment goals for employees. The most common investment vehicle for employer-sponsored automatic investing is a 401k. Employees can choose to automatically invest a percentage of their paycheck in an employer-sponsored 401k. Many employers will often match a percentage of their employees' automatic investment as part of their benefits program.
Companies may also offer additional options for automatic investing, such as company stock or Z-shares at a mutual fund company. These automatic investing options help to promote loyalty and long-term tenure.
Additionally, some companies may partner with financial firms through their benefits program to offer other options for automatic investing. These partnerships can support short-term investing goals and holistic financial planning. Benefit program partnerships may allow for automated investing in customized investment accounts or to an account that is managed by a roboadvisor.
Automatic Investment Plans for Individuals
Outside of employer-sponsored automatic investment plans, individuals also have a wide range of options to choose from in the investment market. Nearly every available investment account offering provides investors with the option to make automatic investments.
Some of the most common investment accounts for making automated investments include retirement accounts and brokerage accounts. Some retirement accounts offer incentives for investors to make automated investments. Many investing platforms also offer options for electing to save automated investments in a money market account, earning interest until the money is allocated to other types of securities.
One form of AIP that helps grow investments in a single stock is a dividend reinvestment plan (DRIP). A DRIP is a program that allows investors to automatically reinvest theircash dividendsinto additional shares orfractional sharesof the underlying stock on the dividend payment date. Although the term can apply to any automatic reinvestment arrangement set up through a brokerage or investment company, it generally refers to a formal program offered by a publicly traded corporation directly to existingshareholders.
Automatic Investing with Roboadvisors
In the fast-growing fin-tech market, many new options for automated investing are also being introduced called roboadvisors. Fintech companies offer micro-investing platforms that allow investors to make automatic investments in small increments. Acorns provide one example. The platform connects with an investor's bank account to invest spare change (round-ups) from each purchase in an elected investment portfolio. Wealthfront and Betterment are two other well-known roboadvisor platforms.
Robo-advisors, for the most part, automate indexed strategies intended for long time horizons. They tend to follow passive investment strategies informed by modern portfolio theory (MPT) to optimize asset allocation weights to maximize expected return for a given risk tolerance and then keep those portfolio weights balanced.
What makes roboadvisors unique is that they are ultra-low-cost and have very low minimums to get started—meaning that even beginners can get optimized portfolios with small dollar amounts. They are also set-it-and-forget-it in many ways, meaning that it is truly automatic.
Automatic Investment Plan Advantages
There are numerous techniques and market products available for investors interested in making automatic investing contributions. Investors making automatic investments through an employer-sponsored benefits program will also typically save money on transaction costs and experience lower fees.
By "paying themselves first," many people find they invest more in thelong run. Theirinvestmentsare treated as another part of their regular budget. It also forces a person to pay for investments automatically, which prevents them from being able to spend all of theirdisposable income.
I'm well-versed in automatic investment plans (AIPs), possessing practical experience and a comprehensive understanding of their workings. AIPs stand as a pivotal strategy for investors, allowing consistent contributions to investment accounts at regular intervals, fostering disciplined financial habits and capitalizing on market mechanisms.
Employer-sponsored AIPs function through various avenues, notably the popular 401k plans, enabling employees to divert a portion of their paycheck into investment accounts. These plans often include employer matches, enhancing the investment potential. Additionally, partnerships with financial firms augment these programs, offering diversified options for automated investing, ranging from customized accounts to roboadvisor-managed portfolios.
Beyond employer-sponsored plans, individuals wield a broad spectrum of options in the investment market. Retirement accounts and brokerage accounts commonly facilitate automatic investments, with incentives in certain retirement plans to encourage this practice. A notable form of AIP is the dividend reinvestment plan (DRIP), allowing automatic reinvestment of cash dividends into additional shares of the underlying stock.
Roboadvisors, a product of the burgeoning fintech sector, introduce innovative avenues for automated investing. Platforms like Acorns, Wealthfront, and Betterment enable investors to make fractional investments, harnessing spare change from everyday transactions for investment purposes. These roboadvisors typically adhere to passive investment strategies informed by modern portfolio theory, optimizing asset allocation based on risk tolerance and maintaining balanced portfolio weights over time.
The advantages of AIPs are multifaceted. Through employer-sponsored programs, investors can save on transaction costs and experience lower fees. AIPs encourage a "pay yourself first" mentality, fostering increased long-term investments and integrating them into regular budgets, curbing impulsive spending.
The essence of AIPs lies in their ability to automate and systematize investments, fostering financial discipline while harnessing the power of consistent contributions in a diversified portfolio.
