You’ve probably come across the term “robo-advisor” in the media at some point. It has become a popular way to refer to the more automated approaches to managed investing that have emerged in the last several years.
It can be a bit misleading, however, since it implies that robots or computers are calling all the shots regarding your financial assets. That’s not necessarily the case.
It’s true that robo-advisors digitally automate the more routine and time-consuming aspects of investing. But the creation and management of the actual investment portfolios are still in the hands of human experts.
While some financial companies might offer automated investing that involves little-to-no human monitoring, a more comprehensive approach includes both a team of specialists and computer algorithms to continually analyze and rebalance your portfolio.
One of the more obvious reasons why a robo-advisor is a smart move in any market is that it can ultimately help you save on fees—automation keeps advisory fees at a fraction of most traditional advisors’ fees. But cost savings aside, there are many reasons to consider this modern way to invest. Here’s why.
Resist the headlines.
With skyrocketing growth, news reports often tout the market’s latest high with stories about the hottest stocks. All of which can be a siren’s song, luring you to invest your hard-earned cash at a moment’s notice with little-to-no research.
Since 2013, the Dow Jones Industrial Average (DJIA) has skyrocketed an astonishing 10,000 points, growing to more than 25,000. This historic rise is the second biggest bull market since World War II.
It’s just as easy to make a sudden decision during the low time of the bear due to increased anxiety that often comes with any downward movement. Even the most experienced investor can make a knee-jerk financial decision, leading to poor investment outcomes.
Because robo-advisors provide an automated process for investing based on your goals, they can help you avoid emotionally driven decisions fueled by headlines, market highs (or lows), friend recommendations, and gut feelings. But remember, no matter what type of investing you do, there’s always risk. So be sure to have clear expectations in mind before you make any decision.
Remain in the driver’s seat.
If you think a robo-advisor is too automated for your taste, you might think again. It’s true that computer algorithms do much of the hands-on work that self-directed trading or traditional financial advising requires, but you also have to set some guidelines. Plus you can also have a team of specialists monitoring your account at financial institutions that offer this level of service.
For example, through our Ally Invest Managed Portfolio, you can create your own plan by specifying what you want to accomplish with your investments and how much risk you can tolerate.
Then a team of our specialists—with the assistance of automation—does all the heavy lifting. This includes determining which portfolio best complements your situation and re-balancing to keep your portfolio on track—all in an effort to maximize performance while minimizing risk.
You can also view how your portfolio is performing, change your goals, and call or chat with a specialist at any time with our Ally Invest Managed Portfolio.
Previously, you had to pay a hefty fee to a financial advisor to actively manage your portfolio to obtain this level of service. Today, this digital approach to investing gives you access to a tailored investment approach at a low cost.
Solve for “set-it-and-forget-it” mentality.
If you like to take your financial future into your own hands and do your own trading, you probably don’t think a robo-advisor is for you. But are you a self-directed investor that tends to “set it and forget it?”
Many self-directed investors can slip periodically into a “set-it-and-forget-it” mentality when it comes to investing. They start out strong: smartly building a portfolio that consists of a variety of investments. And then they get busy or find they can’t keep up with the market shifts.
If this sounds like you, an account that’s continually optimizing for your pre-set financial goals might be a better match for you than a do-it-yourself, self-directed approach.
Balance your portfolio.
Before you make any investment—whether you’re buying stocks, bonds, mutual funds, or other financial products—you need to do some research. After all, today’s “must buy” may be significantly riskier than what you’re comfortable with.
If you often find yourself in a time crunch, you could run the risk of making uninformed choices, which could potentially lead to an unbalanced portfolio made up of investments in one sector.
You don’t want to put all your eggs in one basket, so to speak. A robo-advisor can help you build a professionally designed, diversified portfolio of low-cost exchange-traded funds (ETFs) that match your risk tolerance and monetary goals.
Auto-adjust for market fluctuations.
The perks of a robo-advisor don’t end with the creation of a balanced portfolio.
In a bull market, even though the overall trajectory is upwards, some assets will perform better than others. Over time, the holdings within your portfolio could get out of balance, no longer aligning with your risk tolerance or goals. The same goes with the downward movement of a bear market.
Robo-advisors continually monitor your account and automatically re-balance your investments so they remain aligned to your target allocation, maximizing returns during the stock market’s up and down times.
Guard against a false sense of security.
Do you stash all your savings in one fund thinking that it will give you a diversified portfolio for little expense?
This is a common strategy used among investors. Index funds are made up of stocks or bonds that mirror the performance of a benchmark index, such as the Standard & Poor’s 500 or the Dow Jones Industrial Average. These types of ETFs typically have low fees because they’re passively managed and don’t attempt to beat the market.
In a sense, an index fund is diversified because the portfolio of securities it represents consists of numerous stocks or bonds. But because it often follows only a specific segment of the stock market, investing in a single index fund could leave you unnecessarily at risk. Doing so could also mean that you’re missing out on potential earnings.
You don’t need to choose between expensive, actively managed funds or an investment strategy that leaves your portfolio in desperate need of diversification.
There are digital-savvy solutions that can help recommend a balanced portfolio equipped with multiple ETFs that align with the performance of the overall stock market at lower costs.
Bottom line: What’s the best way for you to manage your investments?
If you have the time to conduct your own investing supported by the necessary research and attention, then self-directed is a great way to control your financial destiny. If not, a more automated approach, like a robo-advisor, may be a smart alternative to help build wealth.