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Financial Literacy

Systematic vs. Discretionary Investing

Are you someone who lives and dies by your schedule? Or do you prefer to make spur-of-the-moment decisions? Your answer could dictate what type of investment schedule you choose: systematic vs. discretionary investing. Both are viable investing strategies, but they vary greatly in terms of how they work and the approach investors need to take. 

If you’re a schedule-focused, by-the-books person, systematic investing is going to be a familiar concept for you. If you’re prone to taking things as they come and adapting on the spot, discretionary investing might be a more natural approach. There’s no wrong answer, but getting it right means sticking with the strategy you choose. 

Systematic vs. Discretionary Investing Comparison

Systematic Investing Strategy

Specifically, systematic investing is a set-schedule approach to investing. Systematic investing plans (SIPs) involve contributing a specific amount of money at specific intervals over a prolonged period of time. For example, you might choose to contribute $500 on the first of each month to a Roth IRA. This set schedule takes the variability out of contributions. This makes it easier for individuals to contribute and control their investments.  

There are two types of SIPs out there: self-managed and directed. Self-managed SIPs are simply the schedule you set for yourself, such as contributing to an IRA or brokerage account. Directed SIPs usually take the form of mutual funds or employer-sponsored 401(k) programs, where contributions are preset. In either case, the contribution amount and schedule remain the same. 

Systematic investing takes full advantage of compound interest. Regular contributions to principal allow for strategies like dollar-cost averaging and dividend reinvestment. These strategies increase the earning potential of compounding accounts. 

Pros of Systematic Investing

  • Regular predetermined contributions keep investors consistent and mindful of their contributions. It creates good habits that promote long-term thinking. 
  • Recurring investments allow for automatic dollar-cost averaging. This brings down the total aggregate average of an investment and increases appreciation power.
  • Recurring contributions to the principal amount increase the compounding potential of investments. The longer the time horizon, the higher the returns.

Cons of Systematic Investing

  • Obligatory contributions can put strain on everyday finances if income is inconsistent or unexpected expenses arise. 
  • Buying power doesn’t remain the same month after month. As holdings appreciate, static contribution limits mean less and less purchasing power.
  • It is not as flexible as discretionary investing with regard to when or how to invest. This can mean missing opportunities created by market conditions.

Discretionary Investing Strategy

As the name implies, discretionary investing is a strategy that doesn’t adhere to any set schedule. It’s a more active approach to investing, which sees investors contributing, buying and selling at their discretion. Or, more often, it means entrusting a portfolio manager to do this on your behalf.

This approach offers significant flexibility but comes at the cost of consistency. For those who thrive on agility and flexibility, there’s great opportunity in discretionary investing. You just need to be confident in your investing thesis and acumen. 

Discretionary investing can also refer to the active management of a portfolio. For example, a growth investor might choose to take profits from a long-term holding to purchase shares in a new IPO. They’re making active decisions about how to rebalance a portfolio to take advantage of an opportunity, instead of sticking to a regular schedule of defined contributions. 

Discretionary investors need to work a little harder to manage their portfolios. But, in doing so, they’re privy to opportunities systematic investors aren’t: buying before a promising earnings announcement or selling shares of a cyclical fund at its peak, for example. These opportunities are a great way to maximize ROI (return on investment) outside of a regular contribution cycle.  

Pros of Discretionary Investing

  • There is lots of flexibility with regard to when and how to invest. Investors are able to recognize and capitalize on strategic opportunities created by market conditions. 
  • Contribution amounts can change over time. This makes it easier to capitalize on price fluctuations in individual securities.
  • There’s more buying power in lump-sum investments. This unlocks investment opportunities that might be out of reach for investors contributing smaller sums.

Cons of Discretionary Investing

  • It’s more difficult to dollar-cost average down with discretionary investments. This, in turn, makes it hard to take advantage of compounding cycles. 
  • Inconsistencies in investment contributions make it difficult to develop good habits. As a result, investors might try to time the market instead of investing long term.
  • Too much control over investments can lead to second-guessing and frequent rebalancing. Too much activity can trigger unwanted losses or tax events.

Which Option Is Right for You?

If you find comfort in consistency and want the assurance of stability, systematic investing is likely for you. If you’re confident in your investing knowledge and have an appetite for risk, discretionary investing could be a lucrative strategy. Either way, it’s important to stick with your approach and make sure it’s generating a market-beating ROI. 

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Systematic vs. discretionary investing is grounds for debate among many seasoned investors. There is no right answer: only the one that works better for you. It’s best to consider your situation, grip on investment products and contribution capabilities before coming down on one side or the other. That said, if you’re unsure of how to invest, a systematic approach is a defensive one that’ll serve you well.


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