Formula Investing

AAA

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.


INVESTOPEDIA EXPLAINS '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.


RELATED TERMS
  1. Capital Markets

    Markets for buying and selling equity and debt instruments. . ...
  2. Goal Seeking

    The process of finding the correct input when only the output ...
  3. Dollar-Cost Averaging - DCA

    The technique of buying a fixed dollar amount of a particular ...
  4. Automatic Investment Plan - AIP

    An investment program that allows investors to contribute small ...
  5. Black Box Model

    A computer program into which users enter information and the ...
  6. Market Risk

    The possibility for an investor to experience losses due to factors ...
RELATED FAQS
  1. What does Value at Risk (VaR) have to do with maximization of shareholder wealth?

    By enabling investors to estimate with high probability the worst-case and best-case scenarios for the performance of a given ... Read Full Answer >>
  2. How can I calculate the tracking error of an ETF or indexed mutual fund?

    Calculate the tracking error of an indexed exchange-trade fund (ETF) or mutual fund by doing a standard deviation percentage ... Read Full Answer >>
  3. Besides stocks, what other asset classes can I invest in through ETFs?

    One of the main advantages of exchange-traded funds (ETFs) is that they offer investors the opportunity to invest in an extremely ... Read Full Answer >>
  4. How does the risk of investing in the aerospace sector compare to the broader market?

    Investing in the aerospace sector is riskier than investing in the broader market. The most accurate measure of sector volatility, ... Read Full Answer >>
  5. How does a pension income drawdown work?

    While there are similar drawdown plans in the United States, a pension income drawdown plan most commonly refers to a specific ... Read Full Answer >>
  6. What is the most important section in an investment company's prospectus?

    It is important for investors to examine all information contained within an investment company’s prospectus. However, the ... Read Full Answer >>
Related Articles
  1. Active Trading Fundamentals

    Tips For Controlling Investment Losses

    A profit/loss plan helps investors recognize mistakes and invest logically, rather than emotionally.
  2. Investing Basics

    Barking Up The Dogs Of The Dow Tree

    One well-known and successful strategy for cashing in on dividends is the Dogs of the Dow. Here's what you need to know about them.
  3. Options & Futures

    Trader's Corner: Finding The Magic Mix Of Fundamentals And Technicals

    For a record-holding stock trader, CANSLIM is the formula that identifies this magic mix.
  4. Mutual Funds & ETFs

    Safest Industries To Invest In

    Which are the safest industries and sectors for long-term investment and why?
  5. Bonds & Fixed Income

    How Are Zero-Coupon Municipal Bonds Taxed?

    What every investor needs to know about taxes and zero-coupon muni bonds.
  6. Mutual Funds & ETFs

    Top 4 ETFs That Will Help Diversify Your Portfolio

    Seeking low cost diversification to high quality stocks and bonds? Consider these 4 ETFs.
  7. Bonds & Fixed Income

    Muni Bonds, Taxable Bonds or CDs: Which is Best?

    Here's how to tell if municipal bonds are a better investment than taxable bonds or CDs.
  8. Mutual Funds & ETFs

    Mutual Funds or ETFs: Which is Better?

    Trying to decide between a mutual fund or ETF? Here's what you need to know.
  9. Investing

    The Case For Stocks Today

    Last week, U.S. equities advanced with the S&P 500 Index notching new records. Investors are now getting nervous with rate and currency volatility spiking.
  10. Investing

    Financial Gifts For Grads: Kindergarten To College

    If you really want to help your grad preparing for the future, consider a present that supports their long-term goals—an early start to financial planning.

You May Also Like

Hot Definitions
  1. Mixed Economic System

    An economic system that features characteristics of both capitalism and socialism.
  2. Net Worth

    The amount by which assets exceed liabilities. Net worth is a concept applicable to individuals and businesses as a key measure ...
  3. Stop-Loss Order

    An order placed with a broker to sell a security when it reaches a certain price. A stop-loss order is designed to limit ...
  4. Covered Call

    An options strategy whereby an investor holds a long position in an asset and writes (sells) call options on that same asset ...
  5. Butterfly Spread

    A neutral option strategy combining bull and bear spreads. Butterfly spreads use four option contracts with the same expiration ...
  6. Unlevered Beta

    A type of metric that compares the risk of an unlevered company to the risk of the market. The unlevered beta is the beta ...
Trading Center