Managing investments is an unusual hobby that not everyone desires to pursue, nor should they be obligated to do so. Automated investing, or robo-advising, lends itself to the idea that people can make money without moving a finger.
For people new to investing or who have grown weary of keeping an eye on stock charts, the process can be one way for you to set it and forget it at a very low cost. But just as importantly, before getting into this, you should know the game.
It Runs on Algorithms, Not Guesswork
Automated investing should not be someone picking stocks for you. It is generated instead by algorithms—intelligent computer programs that follow standard investment rules.
To figure out your financial goals, how much risk you’re willing to take, and how long you want to invest, you’ll need to answer a few questions. The platform then constructs a pool of investments that fits that profile.
Robo-advisors prevent people from making decisions on impulse that could potentially ruin their investment. This makes them useful for people who want a consistent, worry-free system free of charge.
Perfect for Beginners and People Short on Time
These platforms are literally built for ease. It doesn’t matter how old you are, how much experience you have, or if you know what finance terms mean. The platform takes over once you’ve finished setting it up. It chooses your investments, diversifies your capital in various assets, and reinvests its income.
According to a Statista study, more than $1.4 trillion around the globe is invested in robo-advisors, and this figure is about to get larger. People are using these tools more and more, simply because they work and help our busy lives.
You Still Need to Learn the Basics
Automation may exist, but it doesn’t mean you should ignore it. You do need to know more about the investment, how fees work, and the risk that comes with it. The idea is that while a robo-advisor will take care of the details, you should still know what stocks, bonds, and markets are.
When markets go down, Investopedia notes, you can sleep well at night when you have your basics right. The more you are aware of your portfolio, the less likely you are to panic or do things rapidly.
Low Fees, But Not Free
People mostly choose robo-advisors because they don’t cost much. The majority of platforms impose an annual fee that ranges from 0.25% to 0.50% of your balance, which lowers the amount of money you make. The fees that are typically charged by traditional financial advisors are significantly higher than that amount. But it’s not completely free.
The actual investments held in your account—like ETFs or mutual funds—will still have small fees. Morningstar suggested keeping an eye out for other costs beyond just fees, including minimum balance requirements or charges associated with anything related to speaking with a human advisor. While a few platforms are free, some charge additional costs for various services.
Better for Long-Term Goals
In the long run, robo-advisors are used. These platforms might not be good for people who want to trade often or quickly build up their wealth. But if your goals are more long-term, like retirement, buying a home, or paying for school in the future, regular automation can help you stay on track with your plan.
NerdWallet writes that these platforms bail when markets get rocky. They do not become anxious. The plan is followed by them. In addition, they automatically rebalance your portfolio and invest regularly to help you maintain consistency without requiring constant thought.
Should You Try It?
Automated investing is not meant to take the place of real advisors. It’s about giving more people easy access to smart investing tools. This might be a good fit for you if you like the idea of setting it and forgetting it.
Pick a platform that matches your goals and comfort level. Take time to understand how it works. After that, check in every now and then to see how your money is doing. To begin, you don’t have to know everything. In fact, you just need to be willing to begin—and let the system do the work in the background.
