Before the internet, investing was a complicated operation that required calling a broker and giving instructions or relying on their advice. Fortunately, today the process is so simple that it even allows us to automate investments. As we’ll see, putting investments on autopilot has more advantages than just simplicity. But what exactly is investment automation?
Investment automation involves using algorithms and software to execute investment decisions automatically. It sounds complex, but it can be as straightforward as scheduling a periodic transfer to an investment fund. This approach eliminates the need for constant intervention—with the risks that entails—allowing investments to be managed efficiently and adjusted automatically to market conditions.
Investment automation strategies
We have previously discussed some of these techniques in the blog. Essentially, there are three major automation strategies.
Dollar-cost averaging (DCA)
This strategy involves investing a fixed amount of money at regular intervals—such as once a month—reducing the impact of market volatility. You could manually apply dollar-cost averaging—also known as a constant investment plan. Still, it is more useful and, above all, more convenient to program this periodic investment so that you don’t have to be constantly monitoring and executing it.
Automatic portfolio rebalancing
Rebalancing the investment portfolio is essential to ensure that its composition remains constant. Automation allows for the automatic adjustment of asset allocation in the portfolio according to changes in market conditions and investor objectives.
Asset purchase based on conditions
Automatic rules can be established to buy or sell assets based on specific indicators, providing a quick response to changes in the market. For example, setting a rule to sell shares of X if their price surpasses or falls below a certain level. Most investors will be satisfied with the automatic portfolio rebalancing, as it will sell assets when they are expensive—e.g., stocks—and buy others—e.g., bonds—when their price falls.
Advantages of investment automation
Putting investments on autopilot has many benefits. We highlight three.
More rational decisions
Automation eliminates impulsive emotional decisions, ensuring that the investment strategy is followed in a disciplined and consistent manner. Financial journalist Jason Zweig likens it to cruise control in a car: if you set the speed control each time you enter the highway, you no longer have to worry about exceeding the limit—or getting fines.
Investment discipline
Another key advantage of automation is that it helps us be disciplined investors. If we suddenly receive an injection of money—prize from a contest, a work bonus, an inheritance—we might be tempted to spend or invest it all at once. By automating the investment, for example, through dollar-cost averaging, we remove temptations from the equation. And we maintain our financial course.
Time savings
Investors can spend less time on the daily management of their investments since automation takes care of strategy execution and checks market developments. It is common for index funds to not only allow periodic contributions but also to regularly rebalance the portfolio. Otherwise, the recommendation would be to manually adjust every six or twelve months.
For all these reasons, investment automation is not only the future but is already transforming how investors approach the market. With the ability to execute investment strategies in a disciplined, consistent, and efficient manner, automation has become a key tool to maximize the potential of investments.
