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Thursday, October 1, 2020

How to Setup an Automatic Investment Plan

An Automatic Investment Plan (AIP) is offered by most brokerage firms.  This do it yourself strategy uses a few simple principles which are ideal for beginning investors.  It may also be possible to avoid brokerage fees entirely.

The plan is to use Dollar Cost Averaging with automation, and look for the lowest possible fees.  The idea of Dollar Cost Averaging is to select an amount to invest regularly, and something to invest in while ignoring the price fluctuations of the market.  Since it is difficult to consistently time the market, or beat the market, a low cost index fund is an easy way to get started.

Get Started

Decide how much you want to invest each month, and then get started right away.  You can always make adjustments later, but try to set it up as a "set it and forget it" type of investment.

1.) Open brokerage account(s) (Roth IRA, brokerage, Traditional IRA). Optional:  Also open a free cash management, or checking account with the brokerage firm. 
2.) Link a checking account to each brokerage account. 
3.) Transfer funds (consider sending at least $10 to $100) to each brokerage account - wait for cash to arrive. Also, optionally schedule ongoing cash deposits, monthly.  The fund will earn interest, and can be used to invest later in stocks such as GBTC, AAPL, TSLA, etc.
4.). Buy an initial amount of no-load Mutual Fund(s).  - wait for funds to buy at the market day. 
5.)  After the initial purchase, schedule the automatic purchase of mutual fund(s) from the external checking account.

The cheapest and fairly easy way to get started is to pick a single no-load index fund with the lowest expense ratio.  This one at Fidelity follows the stock market, is completely free, and has no minimum:  FZROX   There is just a $10 minimum for ongoing investments to the fund.

Fidelity, additional choices 

No Transaction Fee Funds Pick funds with no minimums, and lower expense ratios. 

== Example Asset Allocation ==

60% FZROX Fidelity Zero Total Market Index
20% FSAGX - Gold
10% FTBFX - Bonds
10% Cash Savings - automatic transfer from checking

Broker Evaluation

Some common considerations when selecting a stock broker are trading fees, charting, and other trading features, mobile app, etc.  This evaluation is focused on automation, and minimal expenses for beginning investors to get started.  Don't have $100 a month to invest?  No problem you can start with $25, or even $10, so there is no excuse.  The recommendations can change, but the principle remains the same - automatic investing with low fees.

Brokerage, Minimum Initial, Minimum Monthly, Fund, Expense Ratio 
Fidelity, $0, $10, FZROX, 0%
E*TRADE, $25, $20, SWTSX, .04%
Schwab, $100, $100, ...


A financial advisor can certainly help explore different investment objectives, and explain the account types, taxes, annual contribution limits, etc.  Sometimes a little guidance is helpful, and it may be worth the small fees for some expert guidance.  

If your employer offers a 401k or other retirement account match, it's a good idea to take advantage of that.  Whether you have a 401k or not, the IRAs can be a good idea.  First time home buyers can use the funds with no penalty.  You can do your own research on the details.  The point of this article is to give some of you the push you need to start saving and investing.  Starting with something is better than nothing, and a small amout can turn into something big.