WHAT ARE
RECURRING INVESTMENTS?

Recurring investment schemes are structured programs which involve regular and methodical investing. They offer a way of tracking the performance of the financial markets and achieving your investment aims.

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Recurring investments are structured investment programs which aim to help investors to invest consistently. They involve allocating a specific sum of capital at regular intervals so that you can better navigate market volatility. This article delves into how they work and their pros and cons.

What Are Recurring Investments?

The term “recurring investments” refers to when someone invests a pre-determined amount of money on a regular basis. A simple example of a recurring investment scheme could be buying $50 worth of Apple Inc. shares, on the first day of each month, and doing this on an ongoing basis.

There is, of course, room for some flexibility. The amount, frequency, and timing of investments can be adjusted. This accounts for the way that personal circumstances and market conditions change over time. But the advantages of recurring investments come through when you establish a routine which involves investing consistently and over an extended period of time.

How They Work

Recurring investments can be set up to work however any one individual wants them to. The key element is having a well-thought-out plan which starts off by establishing your ultimate goals. 

From there, it is a case of determining how much spare capital you have which can be used to invest in the markets. The final part is to carry out research and analysis and decide which instruments offer the most appropriate levels of risk-return for meeting your goals. When your specific “dealing date” comes around, funds in a savings account will be converted into stocks, ETFs, or even cryptoassets, or a mixture of these and other assets.

Types of Recurring Investments

There are several ways to set up a recurring investment scheme. They can be managed manually, by transferring cash from a savings account into a trading account and executing trades in the market. Alternatively, you can adopt a more hands-off approach and take advantage of services offered by broker platforms which allow you to make automated purchases of the assets you want to hold.

The principles involved with each approach remain the same, and which option you choose will depend on your appetite for overseeing the process, or desire to automate your investing, and cost. 

Advantages of Recurring Investments

Recurring investing is based on the principles of an investment approach called dollar-cost averaging. This involves investing on a regular basis regardless of market conditions, and buying whatever number of shares or similar assets you can afford on each dealing day. Adopting this systematic approach has several advantages. 

Mitigating Market Volatility

Investing at frequent intervals over a long period of time allows you to track the overall performance of an asset and avoid the risk of allocating one lump sum which buys at the top of a short-term market bubble. For example, since the inception of the S&P 500 Index in 1957, the index has generated an average annual return of 10.5% over that time-period, but that figure hides the short-term fluctuations which have occurred. 

Using recurring investments means you might not “beat” the market, by, for example, buying dips. But by avoiding the need to regularly decide when you should trade, you will tie your investment to the long-term overall returns of whatever asset you buy.

How They Work

Recurring investing takes the emotion out of trading and investing. This helps avoid the potential pitfalls associated with cognitive bias. The only decision you have to make is to set up a scheme and commit to it. The discipline associated with recurring investing also removes the unnecessary costs incurred by “overtrading”.

Challenges and Considerations

Allocating capital to any investment scheme takes away the opportunity of applying it elsewhere. This opportunity cost might not be an issue if the low-maintenance approach of recurring investing fits in well with your other lifestyle commitments, but could be a challenge if you are looking to be a more proactive investor. These are some other factors to consider.

Managing Investment Costs

Entering into trades involves costs such as trading commissions and other transaction fees. These will directly affect your investment returns so it is important to establish which broker offers the most cost-effective route into the market.

Adapting to Financial Changes

Recurring investing does involve adopting a ‘buy and hold’ mentality but your returns might be impacted if you slip into a ‘buy and forget’ approach. Changes to your personal circumstances might require a rethink of your investment approach and more advanced recurring investment strategies try to optimise returns by factoring in the inevitable changes to market conditions which occur over time.

Liquidity

Any recurring investment scheme should factor in your personal budget. If you don’t keep a reserve of ‘rainy day’ money then you might have to liquidate part of your investment portfolio which could involve selling at the wrong time and will definitely incur transaction fees. 

How do I set up recurring investments on eToro?

Recurring investing on eToro is currently not available in all jurisdictions. But if you are a client to which it has been made available, then you can set one up to invest in single stocks, ETFs, or cryptoassets. 

To get started:

1. Go to the discover page or the page of your target stock, ETF, or crypto and click ‘Get Started’ on the recurring investment banner.
2. Or Go to “Recurring Deposits” here 
3. Or enter your eToro account and click Settings in the left-hand menu, then click on ‘Recurring Deposits’.  
4. Set your payment schedule by customising the day of the month for your deposit or accept the default option.
5. Choose an investment amount. 
6. Select the payment card to be used to fund your strategy. If you don’t have a connected card, you’ll be prompted to add one as the first step in setting up your recurring investment.
7. Follow the on-screen directions to review the terms and conditions and confirm your plan.
8. Click ‘Set Recurring’.

Setting Investment Goals

Whether you are investing to finance a wedding, career break, or achieve financial independence, it is important to establish when you want your investment to mature, and what kind of return you are hoping to achieve. The value of your recurring investment scheme will be the sum of the regular payments plus or minus the returns on the investments.

It is important to remember that recurring investments don’t remove the risk of your investments falling in value. It is more the case that the approach will smooth out returns and reduce the risk of your portfolio over or underperforming to an extent which is a long way from a market’s long-term average return.

Choosing the Right Assets 

The recurring investment approach is more about the mechanics of how you trade rather than what you buy. Establishing which markets to invest in will involve choosing assets which offer a degree of risk-return which is appropriate to your personal aims and risk profile. Spreading capital across different assets and incorporating diversification into your strategy should also be considered as that can help mitigate against risk and smooth out returns.

Final thoughts

Recurring investments are a proven way to enhance financial stability and growth over time. By adopting a disciplined approach and being mindful of costs and market conditions, investors can effectively use this strategy to meet their financial objectives. Setting up a scheme which automates the investment process will suit many who have other lifestyle commitments but still want to gain exposure to the markets, but there is still a need to factor in the well-established golden rules of investing.

Visit the eToro Academy to learn how to get the most out of recurring investment strategies.

FAQs

How can recurring investments help in managing investment risks?

Recurring investing helps manage risk by bringing into your approach features of the five golden rules of investing. It encourages you to have a well thought out idea of what your aims are and a plan of how to achieve them. Making regular contributions instills discipline into your trading and can help counteract psychological biases. And if those payments are split across asset groups you’ll benefit from diversification as well.

What amount of money do I need to set up a recurring deposit investment plan?

The minimum amount needed to set up a recurring investment plan varies by financial institution, but it is usually a small amount. This  opens up the option of adopting an often used risk management tool of starting using smaller amounts and scaling up once you have greater confidence and understanding. Even modest regular contributions can accumulate to be a significant size over decades.

Are recurring deposit investments expensive?

The fees charged will vary depending on what broker you sign up with and what assets you buy. At eToro for example, positions opened through a recurring plan are exempt from paying the commission fee for stocks. However, the fee still applies when closing. It is important to gain a full understanding of the T&Cs before you start investing. 

“What happens if an exchange I am due to invest in is closed on the scheduled date?”

If the exchange is closed on the date you are scheduled to make an investment then the trade will be executed on the next day the market is open.  

Can anyone set up a Recurring Investment scheme on eToro?

No. The question of whether you will be able to gain access to and use Recurring Investment schemes on eToro will depend on where you live. It is also worth noting that the list of countries on the approved list is subject to change.