DEFINITION of 'Formula Investing'
A method of investing that rigidly follows a prescribed theory or formula, using the results as blanket investment policy. Formula investing can be related to how an investor handles asset allocation, investments between funds or securities, or decides when and how much money to invest.
BREAKING DOWN 'Formula Investing'
One of the most valuable traits of formula investing is that a lot of the decision-making is taken out of the process, which can be a stress reliever for some investors. With formula investing, they simply follow the rules or formula and invest accordingly.
A simple strategy like dollar-cost averaging can help investors to build up their portfolios in a piecemeal fashion, adding small amounts of money over a consistent time frame. An investor must make sure that the formula fits with his or her risk appetite, time horizon and liquidity needs in order for it to be the most effective.