Most people invest one way in their retirement plan, and another with the rest of their money.
That statement is not about investment strategy–aggressive or conservative–but about a basic strategy of investing.
Retirement plans such as a 401(k) or 403(b) typically require regular withdrawals from paychecks, an amount chosen by the employee that goes directly into his investment account. The idea is automatic, pain-free investing that allows for purchases at regular intervals, regardless of market conditions, and lets a nest egg grow into something significant over the years.
Yet when it comes to saving outside of retirement plans, most investors do not make regular automatic investments.
“It’s the easiest way to take a little money and have it grow into something,” says Robert Powell, managing director at DALBAR Inc., a Boston financial research firm. “Maybe people don’t have anything left to save. If they have something left over, you would think this is how they would save it.”
Yet unpublished data from a recent Investment Company Institute/Securities Industry Association study showed that of investors who own funds only outside of retirement plans, just 24 percent enroll in automatic investment programs to move deposits from a bank account or paycheck to their funds.
There is no industry-wide statistic for use of automatic investment and direct-deposit programs by all investors, but the major fund companies and transfer agencies report that anywhere from 10 to 25 percent of their retail (non-retirement) accounts take advantage of automatic savings plans.
As Powell noted, that could be because investors are maxxing out contributions to retirement savings plans. Still, it would seem that any program that endeavors to make investing both easy and relatively pain-free would be embraced almost universally by the investing public.
“It is one of the most widely available features for mutual funds but one of the most underused,” says Investment Company Institute spokesman John Collins. “For most people, this should be a no-brainer, but apparently it isn’t.”
Automatic investment plans have several pluses.
For starters, they represent a low entry price to a fund. The era is gone when most funds allowed investors to open accounts for under $500. Today, the average minimum initial investment is well over $1,000, and most of the fund families offering cheaper entry are no-name companies charging high expense ratios.
But virtually every fund firm waives its minimum requirements for investors who have some amount (typically from $25 to $100) deposited automatically, usually on a monthly basis.
More important, however, is that automatic investment plans have the benefit of allowing an investor to follow one of the key rules of savings, namely “pay yourself first.”
In fact, many fund companies accept direct deposits, so that a portion of your paycheck (or Social Security check) can go directly into a fund the same, easy way it flows into a tax-advantaged retirement accounts.
Automatic savings builds discipline. People who put investing on auto-pilot are less likely to swerve when the market moves. They not only save regularly, but they get the long-term benefits of dollar-cost averaging. If you aren’t familiar with what your fund companies offer, call and learn the rules. Listen carefully to what is said about stopping the program, and to the dates when money can be moved.
Some fund firms impose low-balance fees if you stop an automatic investment program before reaching a certain dollar limit in your account. And because automatic investment plans, unlike direct deposits, come from bank or money market accounts, you need to be sure there is cash on hand when the transfer day arrives or you could face a variety of banking fees.
You may also want to time your money moves so they don’t happen at the time of the month when big bills come due.
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Charles A. Jaffe is mutual funds columnist at The Boston Globe. He can be reached by e-mail at jaffe@globe.com or at The Boston Globe, Box 2378, Boston, Mass. 02107-2378.
