Systematic investing

From Bogleheads

Systematic investing occurs when investors make regular, equal payments into a mutual fund, trading account or retirement account, such as a 401k. Systematic investing encourages the establishment of a regular savings habit, and, because purchases are made at various market prices, investors, in essence, dollar-cost-average the average purchase price of the investment. [1]

While most investors experience systematic investment by participating in employer-provided contributory retirement plans, investment firms supply a number of programs which allow investors to set up an individual systematic investment program. These programs include Automatic investment plans and Contractual investment plans.

Automatic investment plans

Many investment institutions offer an Automatic Investment Plan (AIP), an investment program that allows investors to contribute small amounts of money in regular (monthly, quarterly, semiannual, or annual) intervals. Funds are automatically deducted from the investor's checking/savings account or paycheck. [2] Mutual funds (both in taxable accounts and IRA accounts), variable annuity subaccounts, and 529 savings plan funds are some of the most common vehicles offering an AIP option. [3]

Investors wishing to establish an AIP employing the principles embedded in the Bogleheads' philosophy might consider establishing AIP programs with low cost no-load mutual funds, no-load low cost variable annuities, and direct sold low-cost 529 plan portfolios.

Contractual investment plans

In the U.S. Systematic Investment Plans (SIP) are regulated as Periodic Investment Plans under the federal securities laws. A typical SIP contractual plan allows an investor to accumulate shares of a mutual fund indirectly by making small regular monthly payments, usually as little as $50, over a period of 10, 15 or 25 years. Historically, the majority of contractual plans have been sold to military personnel. These plans impose high upfront commission costs, as much as 50% of the first year payments, and are especially expensive if the full term of the plan is not completed. [5]

Contractual plans have the following characteristics:

  1. High first-year cost. You are required to pay a creation and sales charge equal to as much as 50 percent of the first 12 monthly investments. If you increase the amount of your monthly payments, you may owe an additional creation and sales charge on the new investment [4]
  2. Long-term investment. Typically, systematic investment plans require 180 fixed monthly payments over a 15-year period, with the option of making payments for up to 25 years (300 investments). [4]
  3. No direct mutual fund ownership. Investments in a contractual plan are placed in a trust. The trust invests your regular payments, minus fees and expenses, in shares of a mutual fund. [4]
  4. Missed Payments. The sponsor may terminate your plan if you fail to make investments for a period of 6 or 12 consecutive months. [4]
  5. Fees and expenses. Plan expenses include creation and sales charge fees, mutual fund management and distribution expenses, and various custodial and service fees. [4] The cost burden of the creation and sales charge is revealed in the following table:
Contractual Plan creation and sales fee expense
Contributions discontinued after Creation and Sales fee as percentage of investment
12 payments 50%
18 payments 31.6%
24 payments 25%
60 payments 10%
180 payments 5%
360 payments 3.3%
Cancellation and Refund Rights. An investor in contractual plan can cancel the contract with the following rights.
45-Day Cancellation Right. You will receive a notice of your cancellation rights within 60 days after your first investment in the plan. You can cancel your plan within 45 days of the mailing date of that notice. If you choose to cancel your plan, you will receive a cash refund equal to (1) the current value of your investment and (2) the total sales and creation charge you paid. The current value of your shares may be more or less than your original investment.[4]
18-Month Cancellation Right. You are also able cancel the plan within 18 months after your first investment in the plan. If you choose to cancel your plan after the 45-day cancellation period, you will receive a cash refund equal to (1) the current value of your investment and (2) the amount of the sales and creation charge you paid that exceeds 15 percent of the total investments you've made in the plan. You should receive a notice of your 18-month cancellation right if you miss (1) three or more of your monthly investment payments during the first 15 months of the plan or (2) one or more payments after the first 15 months. [4]

If you cancel your plan after 18 months, you will not be entitled to a refund of any creation and sales charge. This charge can be up to 50 percent of your periodic investments.


  1. Systematic Investment Plan - SIP, definition, investopedia. Retrieved 17 June 2012.
  2. Automatic Investment Plan - AIP, definition, investopedia. Retrieved 14 June 2012.
  3. See Fidelity for an example of AIP offerings. Retrieved 14 June 2012.
  4. 4.0 4.1 4.2 4.3 4.4 4.5 4.6 4.7 Systematic Investment Plans—Educate Yourself Before You Enlist, FINRA alert
  5. Investor Protection Guide: Systematic Investment Plan (SIP) | LII / Legal Information Institute,Cornell University Law School, Retrieved 16 July 2012.

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