How to make a systematic investment plan using rule based investment strategies

Investing 101

Establishing a systematic investment plan employing rule based investment strategies is an investment approach gathering popularity in the investment community. This approach allows investors to design strategies based on what actually happens, rather than on what people think will happen.

Furthermore, a systematic investment plan doesn’t leave room for emotions to play a part in the decision making

This article is a brief guide to a systematic investment plan, to give you an idea of what it is and how it differs from traditional approaches.

The Characteristics of a Systematic Investment Plan

Empirical evidence

Systematic investment plan (SIP) with rules-based investing have many other names; quantitative investing, systematic investing and rules-based investing. Similar strategies also include Factor-based investing, smart beta, momentum investing and trend following. A common theme that differentiates these strategies from traditional approaches is that they make more use of quantitative analysis than qualitative analysis. Typically it is a long term investment approach, that is for a long period of time of more than 20 years.

There are two primary characteristics that most Systematic investment plan use. Firstly, these strategies exploit relationships and patterns that occur repeatedly in markets. These can be at the asset class level, or at the instrument level. The second characteristic is that signals are implemented mechanically, with little or no discretion.

Taking emotion out of the investment process

Any book on investing 101 will tell you that two of the biggest negative influences on investment decision-making are the emotions of fear and greed. Investors allow fear to influence them during periods of volatility. And, they allow greed to influence them during strong bull markets.

With a systematic investment plan in place, all decision-making takes place when the system is created, rather than when trades are implemented. Consequently, decisions regarding the portfolio are made with a long-term focus and without the influence of emotion. On the other hand, discretionary investments are often made on the fly, and in reaction to short-term events. Without a set of rules based on empirical evidence, there is nothing to stop emotions creeping into the decision-making process.

Especially when you just start investing these SIP plans help you to establish, plan for and monitor the progress towards your financial goals. Using a SIP works especially when your are facing a demanding full-time job and have little spare time to follow up on more dynamic schemes.

Rebalancing using rule base investment

Most systematic investment plans with rules-based strategies rebalance portfolios in regular intervals. This can be on a weekly, monthly, quarterly or annual basis. Rebalancing a portfolio ensures that it is constructed correctly and does not drift away from the intended strategy. Furthermore, rebalancing moves profits out of outperforming assets.


Systematic investment strategies make use of hard, rather than soft data. That means that the data is measurable, and not subject to interpretation. Therefore, system developers seldom use soft metrics like management quality and analyst forecasts. Most systems will use hard data like price, volume, volatility, earnings growth and free cash flow. These data sources have the added advantage of being easier to gather.

Systematic investment planning and strategy development

Developing a strategy starts with observation. Developers may explore data themselves, or refer to academic research into patterns or relationships between asset classes. The developer will then build a basic strategy to exploit those relationships or patterns. Historical data is then used to backtest the strategy. The developer will then adjust the parameters of the system and test it once again. This pattern is repeated with the goal of finding a satisfactory balance between risk and return.

If the system generates satisfactory results it must be tested on a separate data set. This is done to ensure the system doesn’t only perform well on a specific dataset. Finally, the developer will test the system on live market data.

Implementation of your Systematic investment planning process

Once you have established your financial goals and overall investment plan, the next step is putting it to practice. Initially define a SIP amount which does not represent more than 50% of your net worth, invest a fixed amount or establish a monthly rate to be set aside. Using a rule based tactical allocation strategies like the ones we advocate for will help you to establish a healthy investment habit and routine.

These allocation models typically employ ETF or invest in mutual funds. Either ETF or mutual fund scheme will reduce costs which can eat a good part of the planned returns. Making sure the instruments in use come from established sponsors or fund houses is also important as this reduces the so called counter party risk, that is the risk of the sponsore going bankrupt.


Because systematic investment planning and rules-based investing makes use of empirical data, the results can be more reliable than strategies that use subjective inputs. Furthermore, discretion is not used when implementing rules-based strategies. This stops emotions creeping into the decision making process.

What’s next ?

See our tactcal allocation models and core investment portfolios to see which one might fit your needs. If you have dobts contact us or post in the forum.

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