Monthly Investment Fund Setup: A Step-By-Step Guide

Setting up a monthly investment fund is a great way to save for the future. It involves putting aside a fixed amount of money each month, which is then invested in various financial instruments such as stocks, bonds, mutual funds, or other investment vehicles. This is a popular alternative to lump-sum investing, where a larger amount is invested all at once. Monthly investment plans encourage discipline and can lead to higher rates of saving over time. They are also recommended by financial advisors as they mitigate the effect of market swings and ensure a more consistent contribution.

There are several ways to set up a monthly investment fund, including doing it independently, with the help of a financial advisor, or through an employer-sponsored retirement plan. When setting up a monthly investment fund, it is important to consider factors such as investment goals, risk tolerance, and the amount you can comfortably set aside each month.

Choose an investment account

There are several types of investment accounts to choose from. Here are some of the most common ones:

• Brokerage account: This is a standard investment account that offers flexibility, as anyone over the age of 18 can open one and there is no limit to how much money you can add to the account. You also have access to a wide range of investment options and can generally withdraw cash whenever you want. However, a brokerage account is a taxable account, which means you have to pay taxes on any realised investment profits.
• 401(k): This is an employer-sponsored retirement plan that offers tax benefits and potentially free money from your employer in the form of matching contributions. However, there are rules and restrictions on how much you can contribute and when and how you can withdraw money.
• Individual Retirement Account (IRA): This is another type of retirement account that you can open and invest in on your own. Traditional IRAs offer tax benefits similar to 401(k)s, and you may have more investment choices and flexibility in when you contribute. However, there are also rules and restrictions on who is eligible for tax deductions, contribution limits, and withdrawals.
• Robo-advisor account: This is a low-cost option where a computer algorithm manages your investments for you. Robo-advisors typically charge a small fee for portfolio management, usually around 0.25% of your account balance.

When choosing an investment account, it's important to consider your goals, eligibility, and the level of flexibility and control you want over your investments.

Decide on your investment goals

Setting up a monthly investment fund can be a daunting task, but it's possible to create a plan that helps you make the most of your money. Here are some tips to help you decide on your investment goals:

Figure Out the End Game

First, consider what you hope to accomplish with your portfolio. Do you want to invest for retirement, or do you have shorter-term goals, such as buying a home or saving for your child's education? Knowing your goals will help you determine how much you need to invest and how aggressive your investment strategy should be.

Break it Down into Monthly Contributions

Once you know your long-term goal, you can break it down into monthly contributions. For example, if you need $1 million to retire in 35 years, you would need to set aside about $700 per month, assuming a 7% annualized return. You can further break this down, such as setting aside a certain amount per paycheck, which can be automatically deducted if your employer offers a 401(k).

Start Small and Increase Gradually

If you can't immediately afford your desired monthly contribution, don't despair. Start with a smaller amount that you can comfortably set aside each month. Then, gradually increase your contributions over time as you adjust your budget and find ways to save more. This approach will help you stay motivated and committed to your investment goals.

Choose the Right Investment Strategy

Your investment strategy should align with your goals, time horizon, and risk tolerance. If you're investing for the long term, such as for retirement, consider allocating a larger portion of your portfolio to stocks or stock mutual funds to maximize potential growth. For shorter-term goals, a more conservative approach, such as investing in bonds or high-yield savings accounts, may be more appropriate.

Monitor and Adjust Your Goals

Remember that your investment goals are not set in stone. Life circumstances, market conditions, and other factors can impact your plans. Regularly review and adjust your goals as needed, increasing your contributions when possible, and staying disciplined during market downturns.

Pick a strategy

There are several investment strategies to choose from, and the right one for you will depend on your financial goals, risk tolerance, and time horizon. Here are some of the most common strategies:

• Passive index investing: This strategy involves putting your money into index-tracking mutual or exchange-traded funds (ETFs), which offer built-in diversification and a hands-off approach. While it doesn't outperform the market, it can be a great choice for beginner investors or those seeking a long-term, buy-and-hold strategy.
• Value investing: Value investors look for stocks that they believe are undervalued by the market. This strategy is rooted in fundamental analysis and can offer long-term opportunities for large gains. However, it may require more time and patience to find successful investments.
• Growth investing: Growth investors seek investments with strong upside potential for future earnings. This strategy often involves investing in younger, smaller companies and can be riskier, but it may offer quicker profits. It is typically suited for investors with shorter time horizons.
• Momentum investing: Momentum investors aim to ride the wave of winning stocks and believe that losers will continue to lose. This strategy relies heavily on technical analysis and short-term data-driven decisions. It can be exciting and engaging but requires a high degree of skill and constant monitoring.
• Dollar-cost averaging (DCA): This strategy involves making regular, periodic investments, such as contributing to a 401(k). It helps to remove the emotional element of investing and can be combined with other strategies. DCA is a wise choice for most investors as it reduces risk and volatility while encouraging a disciplined approach.

When choosing an investment strategy, it's crucial to assess your financial situation, goals, risk tolerance, and time horizon. You should also consider the level of diversification you want in your portfolio and whether you prefer a more passive or active approach to investing.

Research potential funds

When researching potential investment funds, it is important to understand the different types of investments available and their associated risks, returns, and investment time frames. Investments can generally be classified as defensive or growth investments.

Defensive investments are lower-risk options that aim to provide income and protect the capital invested. They are typically used to meet short-term financial goals (up to two years) and diversify a portfolio. Examples include cash, bank accounts, high-interest savings accounts, term deposits, government bonds, corporate bonds, debentures, and capital notes. The average return for these investments over the last 10 years has been around 3% per year, with a very low risk of losing money.

On the other hand, growth investments are higher-risk options that offer the potential for higher returns. They aim to provide capital growth, and some also provide income, such as dividends for shares or rent for property. However, the price of growth investments can be volatile over short periods. These investments are typically used to earn a higher rate of return and meet long-term financial goals of five years or more. Examples include shares, residential and commercial property, and alternative investments such as private equity, infrastructure, and commodities. The average return for these investments can vary depending on the specific type of investment, but shares, for instance, have yielded an average return of 6.5% per year over the last 10 years.

When choosing an investment fund, it is crucial to research and understand various aspects of the investment, including how it works, the type of return it generates, the associated risks, fees, and charges, the investment time frame, and its contribution to your diversified portfolio. This information can often be found in a product disclosure statement (PDS). Additionally, it is important to consider your financial goals, time frame, and risk tolerance when making investment decisions.

There are also different ways to invest, such as managing your investments yourself or using a professional investment manager or financial advisor. If you choose to invest directly, it is important to plan, research, and track the performance of your investments. On the other hand, professional investment managers and financial advisors can offer their skills, knowledge, and expertise, but their services come with additional fees.

Automate your investments

Automating your investments is a great way to ensure you consistently invest over time without requiring additional discipline. It also frees up your time and helps you take advantage of dollar-cost averaging.

Automate Investments in an Employer-Sponsored Retirement Account:

If your company offers a work-related retirement plan such as a 401(k) or 403(b), take advantage of it. Try to maximise your company's matching contribution. This way, you're getting free money for your retirement and automating your finances.

Consolidate Your Investment Accounts:

If you change jobs, remember to roll over your old 401(k) into an IRA. This makes managing your investment portfolio easier and could save you money and improve your returns. Consolidating multiple investment accounts into one place also simplifies and automates your investments.

Automate Investments in Other Retirement Accounts:

Consider setting up a monthly transfer to your Individual Retirement Account (IRA). For 2021, the IRA contribution limit was $6,000, or $7,000 if you're older than 50. You can set up automatic transfers to ensure your cash doesn't pile up.

Establish an Automatic Investment Plan:

Automate investment purchases so that your cash is immediately put to work. You can set up an automatic investment plan with most brokerage accounts, often through low-cost index funds that track a stock market index.

Automate Dividend Reinvestment:

If you hold individual stocks, consider setting up automatic dividend reinvestment. Most brokers allow you to reinvest dividends automatically to buy more shares, boosting your returns over time.

Use a Robo-Advisor:

Robo-advisors use algorithms to create and manage a diversified portfolio based on your risk tolerance and goals. They offer lower fees than human financial advisors, and you can set up direct deposits and recurring transfers.

Work with a Financial Advisor:

If you're navigating a complex financial situation or want personalised advice, consider delegating investment decisions to a financial advisor. They can help you monitor and rebalance your portfolio while freeing up your time.

Use a Micro-Investing App:

Micro-investing apps like Acorns and Stash round up your everyday purchases to the nearest dollar and invest the spare change. They also allow you to set up recurring transfers. However, be aware of their relatively high fees, especially for small account balances.

By following these steps, you can put your investments on autopilot, ensuring consistency and timeliness without constant manual effort.

Frequently asked questions