Recurring investing can help you gain exposure to the financial markets in a relatively hassle-free way, but that doesn’t mean you can’t apply more nuanced strategies. These are the techniques you can use to get the most out of recurring investing and meet your financial goals.
Recurring investing, drip-feeding capital into the financial markets on a regular basis, removes the need to spend an excessive amount of time focusing on the investment process. But there is still a need to have a clear strategy. These are the things to factor into your plan.
Why Is a Strategy Important for Recurring Investments?
Having a well-thought-out strategy is one of the golden rules of investing. Whatever financial instruments you are trading, you need to know that they suit your personal risk tolerance and offer the best chance of meeting your targets.
The same principles apply to recurring investing, but as the RI approach is more hands-off, there are some additional factors to consider when setting up your investment plan.
Diversify Your Recurring Investment Strategy
Diversifying your recurring investment strategy can help to mitigate risk and smooth out returns. It is particularly important in recurring investment strategies because some parts of the buying process are automated, so you need to ensure that risk management is built into your decision-making.
Creating a diversified strategy does not mean you have to forgo assets which are high-risk propositions. In fact, holding some lower-risk assets in your portfolio will smooth out P&L swings and make it easier to hold on to positions in higher-risk, more volatile sectors such as, emerging pharma, airlines, or crypto.
Don’t invest unless you’re prepared to lose all of the money you invest. This is a high-risk investment and you should not expect to be protected if something goes wrong.
Tip: ETFs offer a convenient way of splitting capital across a range of different asset types, sectors, and regions.
Adjusting Recurring Investment Investments Based on Market Conditions
The core feature of recurring investment programs is that they involve regular and consistent application of capital into the markets. That doesn’t mean they can’t be flexible and adjusted according to changes in market conditions, forming trends, and shifts in the macroeconomic cycle.
With recurring investment schemes, you can change the weighting towards assets in your portfolio by adjusting where each new input of capital is invested. If you didn’t set up an RI scheme and instead went into the market to invest all at once, then rebalancing your portfolio later would incur additional transaction costs because of the need to trade out of existing positions to free up capital.
Tip: You may want to rotate into lower-risk assets as your RI scheme reaches maturity to avoid last-minute slip-ups.
Using Dollar-Cost Averaging (DCA) with Recurring Investment Plans
Dollar-cost averaging (DCA) is an investment technique which involves investing a fixed amount of cash into the markets on a regular basis; its principles tie in very closely with recurring investment strategies.
Both the DCA and recurring investment approaches instil discipline into the decision-making process. In each program, regular cash amounts will sometimes buy more assets and sometimes less, depending on whether markets are experiencing short-term slumps or bubbles.
Instead of “timing” the market, DCA and RI investing enable you to spend “time in” the market. That means they don’t try to “beat” the market, but instead “track” it. Given the historical returns of indices such as the S&P 500 Index for many investors, that still offers the prospect of achieving financial freedom.
Tip: Stock markets experience short-term volatility, but the average annual return of the S&P500 Index since 1957 has been 10.26%.
Past performance is not an indication of future results.
Use Recurring Investments as Part of a Long-Term Investment Plan
When starting out investing, it is important to establish when you want your investment goals to be achieved. If you have a long-term investment time-horizon, then your recurring investment strategy can adopt a buy-and-hold approach, which allows time for your portfolio to mature.
Some assets such as growth stocks might require many years to reach their full potential. Investing using an RI scheme allows you to build up a position incrementally and hopefully benefit from the prospects of your assets becoming a reality.
Tip: One of the secrets of successful long-term investing is compounding, where interim returns such as dividends are reinvested.
Using Recurring Investments To Balance Portfolio Risk & Reward
From the time you make your very first capital injection into your recurring investment portfolio, to the time of your final payment, you will be able to dictate which assets you invest in. That allows you to consistently buy investments that offer levels of risk-reward that suit your goals.
Your portfolio might only be small when you start out, but getting the balance right from Day 1 will set up the process of steering your portfolio towards long-term success. If you are new to recurring investing or investing of any kind, then adopting a more risk-averse approach such as in the portfolio below might suit you.
| Example Allocation – Lower Risk |
| Risk Level | Asset Type | RI Allocation (%) |
|---|---|---|
| Low-Risk | Dividend ETFs | 45% |
| Moderate-Risk | Large-Cap Stocks | 45% |
| High-Risk | Cryptocurrencies | 10% |
A more aggressive portfolio could have a breakdown similar to the one below. Adjusting the overall risk-score of your portfolio can be done by either adjusting the percentage of capital invested in each asset class, or by changing which sectors you invest in.
| Example Allocation – Higher Risk |
| Risk Level | Asset Type | RI Allocation (%) |
|---|---|---|
| Low-Risk | Dividend ETFs | 30% |
| Moderate Risk | Tech Indices | 30% |
| Moderate-Risk | Large-Cap Stocks | 30% |
| High-Risk | Cryptocurrencies | 10% |
In the second example, the weighting given to notoriously volatile cryptoassets remains the same, but overall risk-return is scaled up by adjusting the weighting given to lower-risk assets and introducing new asset classes.
Reassessing and Optimising Your Recurring Investment Strategy
Recurring investing is relatively low maintenance, but there is still a need to monitor and manage your portfolio. Over time, the assets you buy will fluctuate in price and that could cause your portfolio to shift to have a risk-profile which doesn’t match your initial intentions.
How To Reassess Your Recurring Investments
The portfolio area of your investment account will provide details on the total value of your holdings and what percentage of your portfolio is made up of different types of assets. Monitoring this is important because an investor who each month invests 10% of their capital in cryptoassets, won’t always have a portfolio where cryptoassets account for 10% of the total portfolio value. If cryptoassets outperform the other assets, then “portfolio creep” could see crypto make up a far greater percentage of your portfolio.
Tip: Bear in mind that changes to your personal situation may result in a need to adjust your investment objectives.
How To Optimise Your Recurring Investments
If you find your portfolio no longer matches your aims to an extent where you feel a need to rebalance your portfolio, there are two ways to process that change.
The first approach is to sell some assets you already own and buy others. Rotating from one asset class to another will bring about instant rebalancing, but could incur additional frictional costs such as trading commissions.
A more cost-effective approach is to adjust what financial instruments each new capital injection is spent on. Devoting more capital to assets which are “underweight” in your portfolio will allow you to restore the balance of your portfolio over time. While there are fewer costs associated with this approach, you will need to decide if you are willing to accept the market risk associated with this approach.
Tip: Recurring investment schemes involving smaller-sized trades can help novices to make a gradual entry into the markets.
Final thoughts
Recurring investing is a good fit for anyone looking to adopt a user-friendly “buy-and-hold” approach, but no investment scheme should ever involve “buy-and-forget.” Developing a better understanding of the strategies which fit well with the RI approach will help you to both mitigate against risk and optimise your returns.
Visit the eToro Academy to learn how to get the most out of recurring investments.
FAQs
- How often should I rebalance my portfolio?
-
That will depend on your personal goals and the extent to which you want the split of assets in your portfolio to match your stated goals. The lower your threshold in terms of your portfolio structure diverging from the optimal level, the more times you’ll have to adjust what your next cash investment buys, or sell one asset group to purchase another.
- Can I change the amount of cash I regularly invest if markets crash?
-
Yes. The functionality of recurring investment schemes is user-friendly, and it is possible to adjust the amount of cash you invest in each instalment. There may be times when you feel the market is experiencing a short-term slump, but will make a long-term recovery, and that scaling up on your capital injections to take advantage of lower prices is a good idea. Adjusting the size of the regular payments means you will “track” the market to a lesser degree, but that may be a risk you are willing to take.
- What are fractional shares?
-
Fractional shares are parts of a company’s shares that investors can buy instead of a whole share. Some stocks such as Tesla, Inc. can cost several hundred dollars each to buy, and fractional shares allow investors to gain exposure to “expensive” stocks, without committing the capital which would be required to buy one whole share.
This information is for educational purposes only and should not be taken as investment advice, personal recommendation, or an offer of, or solicitation to, buy or sell any financial instruments.
This material has been prepared without regard to any particular investment objectives or financial situation and has not been prepared in accordance with the legal and regulatory requirements to promote independent research. Not all of the financial instruments and services referred to are offered by eToro and any references to past performance of a financial instrument, index, or a packaged investment product are not, and should not be taken as, a reliable indicator of future results.
eToro makes no representation and assumes no liability as to the accuracy or completeness of the content of this guide. Make sure you understand the risks involved in trading before committing any capital. Never risk more than you are prepared to lose.