Forward Guidance: Ryan Fitzwater on How to Automate Your Portfolio
On this week’s episode of Forward Guidance, Oxford Club Research Director Ryan Fitzwater joins us to discuss automatic investing.
According to Ryan, the core concept of automatic investing is “pay yourself first.” It’s an approach that involves transferring money from each paycheck to a retirement or brokerage account - before budgeting for living expenses or entertainment. This approach allows people on tight budgets (and undisciplined savers) to put away money for retirement without seeing it or thinking about it.
As an example, Ryan lays out the long-term effects of automatically investing $10 per day. A 25-year-old investor who saves this amount and earns a 10% annual return will have approximately $1.66 million by the time they turn 65.
This approach has several advantages over “manual” investing. It’s a passive approach that requires very little maintenance, and it’s also more cost-effective than making large, sporadic investments. That’s because automatic investing carries the advantage of dollar-cost averaging.
By making small contributions to a retirement account throughout the year, an investor ends up buying securities at their yearly average price. That way, they avoid the risk of buying into a stock or bond at an unusually high price.
One of the easiest ways to set up such a system is through automatic paycheck deductions. But workers who don’t have this capability can still set up automatic investing for an IRA. As Ryan explains, many providers, such as Vanguard, allow enrollees to automatically pay into an IRA from an ordinary checking account on a weekly basis.
Many ordinary brokerage accounts offer this feature as well - but Ryan is cautious about setting up automatic investing for any platform that charges trading fees. As he points out, investing $10 in a brokerage account that charges $7 per trade means losing 70% of that investment.
To prevent these kinds of losses, he encourages investors to set up a no-fee system through a 401(k) or IRA, or to make less frequent automatic contributions to a brokerage account.
I then asked Ryan about automatic investing on an irregular income. Many young people are Uber drivers or work tipped jobs that pay inconsistent amounts over time. Ryan acknowledges that it’s tougher for these kinds of workers to invest automatically. They may need to manually set aside a percentage of their daily earnings to invest.
Ryan feels that every worker should abide by the “10% rule,” saving 10% of their monthly or yearly income. He recognizes that 10% sounds like a lot for many workers - but he points out that many people spend 10% or more of their income on frivolities anyway.
According to Ryan, the 10% rule is a minimum - not a maximum. He encourages investors to use an online retirement calculator to determine how much they should contribute to a retirement account (and how often) to reach their goals.
As Ryan points out, asset allocation can also be automated. The Oxford Club encourages investors to build a low-maintenance base portfolio similar to Alexander Green’s Gone Fishin’ Portfolio.
Contributions and allocation aren’t the only parts of the investing process that can be automated. Ryan points out that dividend reinvestment plans (DRIPS) allow investors to take advantage of dividend compounding automatically.
He also notes that limit orders and trailing stop services (such as those offered by our partners at TradeStops) can help investors determine their entry and exit points for individual stocks automatically.
Ryan concludes by emphasizing that the power of automatic investing lies in its passiveness. After all, investors who save and allocate without thinking about it tend to do better than their active counterparts do.
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