A systematic investment plan is a process whereby an investor invests into a mutual fund (or some other investment or investment account such as a 401k plan) on a regular systematic basis. The investment is the same amount each period, and the periods are always the same (monthly, quarterly, yearly etc.).
For example, Investor A invests $200 per month into mutual fund XYZ each month on the first day of each month automatically. That is a systematic investment plan. The investor always invests the same amount into the same investment on the same day (or same period length). Consistency is the key here, a systematic investment plan must adhere to the rules.
I’ve written about systematic investment plans here before, so I’m going to focus more on why a systematic investment plan makes sense for your investment program.
A systematic investment plan has some great advantages. It allows the investor a few things:
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I mentioned the benefits of systematic investing, however there are disadvantages as well. In the example above, the investor would have invested $2,400 per year or a total of $24,000 over ten years. Let’s assume the investor earned 8% per year in whatever mutual fund or portfolio she chose for her systematic investment plan:
In lieu of having the lump sum to invest now, systematic investment plans are the perfect option! However if you have the lump sum to invest, investing now (while always the hardest time to invest) is the best option.
If you’re investing in the stock market to any extent, remember that since 1926 the S&P 500 has had positive returns 72% of the years through 2011. While it’s always hardest to invest now, the odds are against you if you wait to invest.