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Investing via a robo-advisor is worth it for new investors as well as those who have a low risk tolerance. It suits people who want a set-it-and-forget-it investment account.
With benefits such as automatic tax loss harvesting and 24/7 availability, a robo-advisor will suit you best. Robo-advisors provide a way for novice investors to build diversified portfolios.
Some of the key takeaways from this article are:
Why I Should Invest with a Robo-Advisor
Do the many online investment portfolio options overwhelm you? You investigated getting a traditional financial advisor for investment advice, but the fee was a turn-off.
Robo-advisors offer a low-cost alternative to human advisors and use effective strategies and algorithms that help you reach your financial goals. Companies such as Vanguard, Fidelity, and Wealthfront offer automated digital advisor accounts with low fees.
To start, you’ll need to fill out a quick questionnaire, so the platform can learn more about your financial situation and goals. For example, are you signing up to create a retirement account, or do you want to grow your wealth?
Using the information you enter, the robo-advisor will make investment decisions just like a human financial advisor. It will decide on an allocation strategy depending on your risk tolerance.
Here are some of the top reasons to open an account on an automated investment management platform:
Low fees: A human financial advisor usually charges high fees for their advice and creating your investment plan. The services of a robo-advisor are cheaper alternatives to those of traditional advisors.
You can get investment advice as you need it, but most of the investment process is automatic, which is why the fee of a robo-advisor is low.
Automated rebalancing: A robo-advisor uses the investment strategy of automatic rebalancing. It trades assets to ensure the allocation in your portfolio matches your original goals.
Automated investment services use computer algorithms to decide which assets to trade, taking one more task off your hands.
As an example, the algorithm may decide to sell stocks in favor of bonds if the stock market is bearish and the percentage of stocks in your portfolio no longer aligns with your risk tolerance.
Low minimum investment: Another issue is that traditional wealth management solutions frequently require large investments of hundreds of thousands of dollars. A mutual fund might need you to invest a few thousand dollars.
Robo-advisors allow you to start with a few hundred dollars or less.
Available 24/7: A human advisor is not always available, but a robo-advisor works around the clock, making investment choices that help you build wealth. It will invest in stocks, crypto or bonds without human intervention.
Efficient: Based on different risk tolerance levels, experts create robo-advisor investment portfolios. The experts pick the stocks, bonds and other assets that go into each portfolio to help investors reach their goals.
Tax-loss harvesting: Tax-loss harvesting helps you avoid high taxes on short-term capital gains, i.e., profits you earn when selling an asset soon after buying it.
You can offset those gains by selling other assets at a loss. Robo-advisors do this for you automatically.
Diversification: Robo-advisor investing offers diversification. You might find stocks, bonds and other assets in one portfolio. Another portfolio might focus on crypto and real estate.
Yet another one might focus on specific industries, such as the tech sector or cash.
You only need one account with one robo-advisor to build a diversified portfolio that will help your money remain stable in the event of an economic downturn.
Why I Should Not Invest with a Robo-Advisor
Here are some cons to be aware of before you decide to invest with a robo-advisor:
Limited flexibility: Robo-advisors offer a few portfolios to choose from. But if you want to invest in individual stocks, you may be out of luck. Depending on the platform, you may have only a few financial goals to choose from.
Limited interaction: Human advisors might be available to answer questions, but you’ll miss out on face-to-face interaction with a dedicated investment manager. Individual automated investment platforms have varying levels of human interaction.
No personalization: A human advisor will look at specific details of your financial situation, such as your income, goals, risk tolerance and investment preferences. Then, they create a personalized plan for you.
While a robo-advisor creates a plan based on your goals, it won’t be as customized as a plan a human advisor creates.
No financial planning: You won’t have access to budget planning and other financial advice from a human financial advisor. A human financial planner will help you create a budget, figure out how to maximize your income, prepare for retirement and more.
3 Best Robo-Advisors
If you decide to invest in a robo-advisor, it’s critical to choose the right one. Look for a robo-advisor with a track record of good returns and low fees.
The three best robo-advisors are:
- Betterment is our top recommendation. It offers various portfolios with different risk levels. It takes a few minutes to sign up and only $10 to start investing. With historical returns of around 7% per year, it’s an excellent choice.
- M1 Finance allows you to invest in custom portfolios with stocks, exchange-traded funds and more. It creates pie charts that help you visualize your asset allocation. In addition, you can add slices from the pie charts that the M1 Finance experts have created.
- Empower has an intuitive interface that is easy to use. There are free wealth management and personal finance tools, such as a savings planner and an investment checkup tool that lets you analyze potential risks in your portfolio.
Is a Robo-Advisor Right for You?
A robo-advisor isn’t for everyone. However, it’s a great option if you prefer a hands-off investment management plan that grows your wealth without the high fees of a traditional investment advisor.
To start, choose one of the three platforms listed above and create an account.
Here are answers to some of the most common questions we get from investors:
Who should invest with a robo-advisor?
People who are new to investing and want a managed, low-risk solution without high fees should invest with a robo-advisor.
Do rob-advisors have good returns
Yes. The best robo-advisors have excellent returns; Wealthfront has achieved an average annual return of 6.79% since its inception, and the Schwab Intelligent Portfolios tool calculates average returns for different portfolios and risk levels.
Do wealthy people use robo-advisors?
Some wealthy people do use robo-advisors. However, most can afford personalized investment management options with human expert advisors, so they tend to prefer those services.
Can I trust robo-advisors?
Yes, you can trust a robo-advisor platform if it follows regulations and has a good reputation. Make sure to read reviews online before investing with a robo-advisor.