Benefits of Mechanical Investing Systems

Mechanical InvestingMechanical investing also known as automatic investing, algorithmic trading and black box investing have many benefits.

In our pursuit of converting our strategy into the best mechanical investing system available for the individual investor, we found most individuals wanted to learn more about the systems intuition and the process of how it calculates trades.

Although everyone has heard about how mechanical investing, algorithmic or automated investing is used by the top financial firms and is gaining popularity, few outside this cryptic world of PhDs and programmers understand the true fundamental advantages it provides traders.

In this series I will explain some of the major benefits of mechanical investing, and how it could practically improve your results.


Mechanical Investing Topics:

– Many of the ways you can apply to your strategy to various securities

– Why executing all trades within a strategy matters so much

– Increasing investor discipline through mechanical order execution

– Improving investing consistency

– Less time analyzing and executing trades = more time to spending on the important things in your life.

Benefits of Mechanical Investing?

Mechanical Investing Strategies Can Outperform the Market.
Mechanical investing strategies have been shown to outperform an investment in the S&P 500 benchmark over long periods of time.

Mechanical Trading Requires Less Of Your Time

Investing strategies have a very low turnover on positions. Because there are few trades each year, and trades are identified and executed automatically by the mechanical trading system. The need for you to research the market, and analyze data is eliminated and your time is freed up to do whatever you please.

Low Transaction Cost Compared to Mutual Funds etc…

Mechanical investing involves some turnover in your portfolio as you will trade a few times a year, but the cost is minimal with brokerage fees being the lowest we have ever seen them. Advisers on the other hand can take several hundred dollars a month in commissions, and mutual funds also have an “expense ratio”. The money saved on these fees greatly improves your long term investment returns.

Historical Performance Means Very Little.

Most mutual funds and advisers touts their 1, 3, 5, and ten year returns as marketing for potential investment. The past performance of mutual funds does not mean much. The famous manager Bill Miller, outperformed the S&P 500 for 15 years straight. After than strong run, he had a terrible performance sending the fund’s ten year return below the benchmark. On the other hand Fidelity Magellan, a star mutual fund guy when run by manager Peter Lynch, subsequently underperformed the S&P 500 benchmark for over 15 years after he left.

However, a mechanical investing strategy, has historical performance which is more meaningful. Because it is not based on a discretionary trading strategy, but based on objective measures of valuation and efficiency. If you understand backtesting limitations and build a mechanical investing system to work with these limitations you can predict future performance with more certainty. There is never any guarantee that historical results will bear out again in the future. But the likelihood of market behavior continuing to do what it has always done in the past is pretty high.

Reduces Emotion From Your Investing.

One of the single greatest reasons to follow a mechanical investing strategy is to remove your worst enemy from the equation – you. Emotions cause investors to buy when the market is high, and it causes them to sell when the market is low. Mechanical investing will never remove emotions from the equation but it will great reduce them. Without the risk of you investing outside your investment plan, hoping to catch the next Netflix, Apple or Telsa Motors you will save money in the long run.

Mechanical investing has many advantages. The two keys to being successful with it are to pick a good strategy and stick to it. With over 40% annual returns over a 6 year period, AlgoTrades Automated Investing Formula is clearly a great strategy. Sticking to it through strong years and tough times, should provide you with similarly excellent returns over the long run in the future.


Chris Vermeulen

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