Automatic investment plan (AIP)

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 invest in a pre-established strategy or portfolio. Funds can be automatically deducted from a person’s paycheck or paid from a personal account.

Key takeaways

  • An automatic investment plan (AIP) refers to any number of strategies by which investments are made using funds that are automatically diverted for such purposes.
  • Many pension funds are automatically invested with pre-tax dollars or employer-matched money.
  • People can also structure AIPs on their own, from simple dividend reinvestment plans to fully automated roboadvisors.

Understanding Automatic Investment Plans

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 investing in employer-sponsored investment accounts. People can also choose to set up automatic withdrawals from a personal account.

Automatic employer sponsored investment plans

Employers offer several options for automatic investing through their benefit programs. Investment options help support employees’ short-term and long-term investment goals. The most common investment vehicle for employer sponsored auto investing is a 401k. Employees can choose to automatically invest a percentage of their paycheck in an employer-sponsored 401k plan. Many employers will often match a percentage of their employees’ automatic investment as part of their benefits program.

Companies can also offer additional options for automatic investment, such as company shares or Z shares in a mutual fund company. These automatic investment options help promote long-term tenure and loyalty.

Additionally, some companies may partner with financial firms through their benefits program to offer other automatic investment options. These partnerships can support short-term investment goals and comprehensive financial planning. Benefit program associations can allow automated investing in custom investment accounts or an account managed by a roboadvisor.

Automatic investment plans for individuals

Outside of employer-sponsored automatic investment plans, people also have a wide range of options to choose from in the investment market. Almost all available investment account offerings offer investors the option of making automatic investments.

Some of the most common investment accounts for automated investing include retirement accounts and brokerage accounts. Some retirement accounts offer incentives for investors to make automated investments. Many investment platforms also offer options to choose to store 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 increase investments in a single share is a dividend reinvestment plan (DRIP). A DRIP is a program that allows investors to automatically reinvest their cash dividends in additional shares or fractional shares of the underlying shares on the dividend payment date. Although the term can be applied to any automatic reinvestment arrangement established through a brokerage or investment company, it generally refers to a formal program offered by a publicly traded corporation directly to existing shareholders.

Automatic investment with Roboadvisors

In the rapidly growing fin technology market, many new options for automated investing called roboadvisors are also being introduced. Fintech companies offer micro-investment platforms that allow investors to make automatic investments in small increments. Acorns are an example. The platform connects to an investor’s bank account to invest the spare change (roundings) of each purchase in a chosen investment portfolio. Wealthfront and Betterment are two other popular roboadvisor platforms.

Robotic advisers, for the most part, automate indexed strategies aimed at long-term 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 portfolio weights balanced. What makes roboadvisors unique is that they are very low cost and have very low minimums to start with, which means that even beginners can get optimized wallets with small amounts of dollars. They are also set and forgotten in many ways, which means that it is truly automatic.

Advantages of the automatic investment plan

There are numerous market techniques and products available to investors interested in making automatic investment contributions. Investors who make automatic investments through an employer-sponsored benefits program also often save money on transaction costs and experience lower fees.

By “paying themselves first,” many people find that they invest more in the long run. Your investments are treated as one more part of your regular budget. It also forces a person to pay for investments automatically, preventing them from being able to spend all of their disposable income.

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Mark Holland

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