What is an AIP and Should You Consider It?
Look, we love most things finance. It’s our job. But one thing the industry doesn’t always do very well is acronyms. There’s just so dang many of ‘em. Myriad impossible abbreviations await the poor soul who tries to read a typical finance blog. (Not this blog, of course. This blog is perfectly user-friendly at all times.) APR, EIS, NAV, ISA, EBITDA, CGT, BPR—the list goes on and on. (If you do know all those, though, good for you! You’re probably safe to close this tab and go get a coffee.)
For most of us, the sea of acronyms can be tough to manage. So sometimes, we take it upon ourselves to chuck a couple rocks in that ocean, all in the name of doing our part to educate new investors.
Today, our acronym of choice is AIP. That stands for automatic investment plan, and it’s a mechanism investors can set up that automatically contributes to pre-determined investments on a recurring basis.
How do AIPs work?
AIPs work pretty much the same way other investment plans work. You put your hard-earned cash into an investment asset and wait for the returns to roll in. The only real difference is that you don’t have to strategize, call your bank, remember your passwords, or write a check every time you want to strengthen your position. Instead, you set all that up ahead of time. Choose what you want to buy; decide how much you want to contribute per month, year, etc.; and then let it keep on running as long as you like.
AIPs offer a lot of flexibility. You can set one up to deduct contributions from your paycheck or withdraw cash from a bank account. And you can use AIPs to invest in basically everything. Fun fact: probably the most common AIP is — drum roll, please — your retirement account. When you authorize your employer to deduct 401k contributions from your paycheck (all in the name of getting that sweet, sweet matching), you’re using an AIP.
For investments you know you’ll want to contribute to for the long haul, an AIP is a simple way to save time and effort that could be better spent doing other things. Less time on the phone with your bank = more time for thinking about cap rates. (Just us? Okay, we’ll admit that’s kind of a weird hobby.)
What are the pros and cons of an AIP?
The biggest draw for AIPs is convenience. Life is busy, planning your finances is hard, and every marginal task you tack onto a given week encroaches just a little bit more on your precious spare time. If you know you’d like to continue contributing to a given investment strategy, automation is your friend. (Particularly for the forgetful among us. This writer is happy to admit that he has to return to the grocer after a solid third of his shopping trips. Life’s like that sometimes, okay?)
But that’s not the only reason to use one. Lots of employment-related plans, and plenty of brokerages and similar services, incentivize investors to use AIPs by offering a variety of perks like better rates. And one common variation on the AIP theme is automatic reinvestment, where the fund you’re investing with can automatically reinvest your dividends, fractional shares, and so forth into the fund so you can leverage compound interest without any hassle.
Last, AIPs might be a psychological advantage for some investors. Look, we’re the first to admit that delayed gratification is hard. Putting a solid chunk of your paycheck into accounts you might not see for a few decades feels bad. And when investing is a biweekly choice, the temptation to put off investing and overspend might get to you. That’s certainly not true for all investors, but automating something is a pretty effective way to stick with a plan and reduce decision fatigue.
Of course, AIPs aren’t for everyone. First off, they’re definitely only a good idea if you have a predictable income. If you earn a salary and get pretty much the same paycheck every two weeks, AIPs are a no-brainer. But if you run your own company, work in the gig economy, work part-time, or otherwise have a less-predictable income stream, automatic contributions might not work well for your portfolio.
And even if AIPs are a good idea for you, that definitely doesn’t mean every AIP is a good idea. There’s a big difference between AIPs that automatically contribute to one or another fund and so-called robo advisors that ask you some questions about your financial goals and then use an algorithm to invest along the guidelines you’ve provided. We’re not saying robo advisors are never a good idea — just that not all AIPs do the same thing, and investors should always read the fine print before they part with their hard-earned cash.
Plus, an AIP can only ever be as good as the thing it’s contributing to. If your AIP puts money into a well-managed fund whose advisors you trust to act on good opportunities and maximize returns, then getting one is probably wise if you can fit it in the budget. But there’s always a chance that laissez-faire approaches will result in missed opportunities. As always, letting someone else call the shots is a good idea if they know what they’re doing — but should make sure they do before you hand over the reins.
One last thing . . .
Alert readers will notice that we haven’t yet said anything about real estate. Curious, right? Well, as much as our generosity motivates us to give our readers the scoop on the broader financial universe, we also had an arguably self-serving reason for writing this one: Reiturn offers an AIP. And, if we say so ourselves, we think it’s pretty great: you can turn it on and off whenever you want and invest however much (or little) money you want on a monthly basis.
Like we said earlier, an AIP is exactly as good as the fund it channels money into. If you trust the investment, an AIP just makes growing your wealth a little bit easier. For us, that’s a pretty good reason to use one.
