Invest smarter, not harder: The power of automation

Every day, we’re faced with a multitude of decisions and these small choices compound to create what psychologists call ‘decision fatigue’. When it comes to investing, decision fatigue can deplete our mental energy, which can lead to impulsive decisions, missed opportunities and, ultimately, suboptimal financial outcomes.

So how can investors avoid falling into this trap? One effective solution is automation. By automating investment decisions, investors can reduce the mental load, create a routine and stick to a long-term wealth-building strategy without letting emotions steer them off course.

In this article, we’ll explore the psychology behind automated investing, the benefits of systematic approaches to investing and how you can build your own automated investment plan with Betashares Direct as a powerful tool for making investing consistent, reliable and simple.

The psychology of investment decisions

The impact of decision fatigue on financial choices

Research on decision-making shows our capacity for optimal choices declines as we become mentally fatigued. Psychologists have found that, after making many decisions, people’s ability to make more decisions over the course of a day worsens¹.

This ‘decision fatigue’ can affect investors just as it affects other areas of life. As fatigue sets in, impulsivity can rise, and people can be more likely to make hasty investment decisions that may not align with their long-term goals.

Psychological biases that undermine investing

Our mental shortcuts, or cognitive biases, can complicate things further. Common biases like loss aversion, where people fear losses more than they value gains, or the tendency to seek immediate gratification over long-term growth, can detract from consistent investing habits.

Over time, emotional decisions made under stress or impulsive changes to a portfolio can disrupt an investor’s overall strategy, potentially resulting in higher risks or reduced returns².

The hidden cost of manual decision-making

When investment decisions aren’t automated, investors are required to actively monitor, decide and allocate funds. This manual approach can not only heighten the risk of human error but also consume valuable mental energy that could be better spent elsewhere.

A study in behavioural finance even highlighted that investors who actively traded experienced lower returns compared to those who stayed the course with a systematic approach, demonstrating the potential cost of manual decision-making³.

Benefits of systematic investing

Reduced emotional bias and improved consistency

By using a systematic approach, investors can override momentary emotional responses.

Systematic investing allows you to invest based on a predetermined plan, reducing the influence of news cycles, market swings or daily distractions that can trigger reactive behaviours.

Regular investment plans as a natural advantage

The process of investing a set amount at regular intervals is a proven strategy to mitigate the risk of market timing. By investing the same amount consistently, you automatically buy more units when prices are low and fewer when prices are high, effectively averaging out the purchase cost over time. This approach aligns well with automated investing and can help investors gradually accumulate wealth without the worry of entering the market at the ‘wrong’ time.

* Note: This is distinct from dollar cost averaging (DCA), which involves splitting up a lump sum into smaller amounts. The two terms however are often used interchangeably.

Creating an automated investment plan

To make the most of automated investing, here’s a simple plan to get started:

1. Determine your investment frequency: Decide on a schedule that suits your lifestyle – e.g. your pay frequency – and financial goals, whether it’s weekly, fortnightly or monthly. This frequency will form the backbone of your plan.
2. Set your investment amount: Choose an amount you’re comfortable investing consistently. It’s often recommended to start small, then gradually increase your contributions as your financial situation allows.
3. Monitor and adjust as needed: Although automation takes the hassle out of frequent decision-making, it’s still wise to periodically review your strategy. Annual or biannual check-ins ensure your investment plan remains aligned with your evolving goals.

Implementation through Auto-invest

For those ready to put a systematic investing approach into action, Betashares Direct’s Auto-invest offers an effective solution. Auto-invest allows you to set recurring investments into up to five Betashares ETFs brokerage-free, making it simple to automate a DCA strategy. You can also set up a recurring transfer from your bank account to your Wallet to ensure sufficient funds for Auto-invest transactions.

You retain control over your investments. You can pause, adjust or stop contributions at any time, making it easy to tailor your investment routine as needed. Auto-invest also provides clear tracking, so you can monitor your investment’s performance.

The power of automation

Automated investing provides a powerful solution to the fatigue that often accompanies regular financial decision-making. Through Auto-invest, investors can harness the benefits of a systematic, consistent approach that not only reduces emotional bias but may help deliver long-term results.

Refer to the PDS for information on interest retained by Betashares on cash balances and Managed Portfolio fees.

Sources:

1. American Medical Association – What doctors wish patients knew about decision fatigue2. Hersh Shefrin and Meir Statman –Behavioral Portfolio Theory3. Barber and Odean –Trading Is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors