Systematic Investment Plans, also known as “SIP,” are a good way for individuals to put their money into investments while spending more time on other matters in life that matter to them. If you like the idea of making your money work for you in a way where you can set it and forget it, this system may be the best fit for you.
Definition of Systematic Investment Plans
Systematic Investment Plans, also known as “recurring investment plans” or “periodic,” are automatic savings plans that allow you to specify a fixed dollar amount, or number of shares in the case of buying stocks or mutual funds, and set the frequency of investment (e.g., monthly or quarterly). A liquid account, such as a money market account or a bank savings account, is often used to fund the payments used to purchase the stocks of your choice.
Dollar-Cost Averaging and Systematic Investment Plans
Regular investing is a key component of dollar-cost averaging (DCA), an investment strategy that involves buying shares at regular intervals. The strategic value of DCA is reducing the overall cost per share in investments. Most DCA methods begin with a schedule for automatic purchases. This routine removes the opportunity for individuals to make poor decisions based on volatile reactions to rises and falls in the stock market.
Systematic Investment Plans and Behavioral Finance
Utilizing systematic investment and finance plans is a smart way to combat your worst enemy as an investor, which can be you. The personal finance branch of behavioral finance shows that certain human actions and negative emotions of greed and fear have a greater impact on how your investments perform than the choice of investment or asset allocation.
People often make their worst decisions in the heat of strong emotions. For example, when stock prices rise and news headlines announce new record highs for stock indices and an endless climate of profit, individuals tend to buy more risky assets like stocks and equity mutual funds. The opposite is also true. When stock prices decline for an extended period, many tend to sell their shares. This habit of “buying high and selling low” goes against wise investing.
A Systematic Investment Plan removes emotion from the finance picture by buying shares of pre-selected investments over time. This is done regardless of what happens in the stock markets hour by hour or what the media says.
How to Start a Systematic Investment Plan
Most mutual fund companies, like Fidelity and T. Rowe Price, offer systematic investment plans. These plans are often easy to set up and can be accessed online. Once you set up a systematic investment plan, you’ll be ready to “set it and forget it,” focusing on other matters in your life that are important to you. Just don’t forget to review your systematic investment plan too often. Try to increase the amount you allocate to the plan as much as you can. One of the best times to do this is when you receive a salary raise. If you send your money to the systematic investment plan directly from your bank account, you won’t even feel the lack and won’t run the risk of spending it.
Source: https://www.thebalancemoney.com/systematic-investment-plan-2466478
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