Successful investing requires knowledge, discipline, and a long-term perspective. But only some have the time and expertise for it. It is easy for us to get carried away by emotional decision-making, by what others may tell us, or by our desire to to take more risks. Thankfully, robo-advisors have brought a new level of accessibility and convenience to investing and, unlike, humans, are not affected by emotions. As digital platforms that use algorithms to analyze market trends and preemptively advise on investments, robo-advisors are increasing in popularity with investors.
This article discusses robo-advisors, how they work, and by what means they can help you achieve your financial goals.
What are robo-advisors?
Robo advisors are digital platforms that help automate investments to some extent. They provide tailored advice using artificial intelligence and algorithm-driven systems. How do robo-advisors work? Typically, they ask you a few questions to assess your profile, compute your risks, scan through available financial products that fit your needs, and give personalized suggestions on investments. You may be asked about your financial situation, your long-term and short-term goals, age, income, risk tolerance, and other factors that will influence the investment style the robo-advisor may choose for you.
You can create comprehensive financial plans using robo-advisors. They help manage portfolios and also make suggestions to rebalance your investments from time to time, depending on market conditions and your changing personal situations. This comes in handy for those who don’t have the financial know-how or enough time to keep a check on their investments on their own.
Robo-advisors provide a low-cost alternative to traditional financial advisors, making financial planning and investment accessible to a broader audience. Let us understand how robo-advisors manage investments.
How does a robo-advisor manage your investments?
Robo-advisors manage investments using sophisticated algorithms. You can either add a robo-advisor to your existing portfolio or sign up with the robo-advisor and create a new portfolio. Once you successfully add the robo-advisor, it will first gather information from you and use it to create personalized investment portfolios.
The basic information a robo-advisors asks investors includes:
1. Your risk tolerance
Assessing the amount of risk you are willing to take allows you to choose the assets you can invest in. While a lot of robo-advisors ask you whether you have high or low risk appetite directly, many offer the option to check your risk tolerance using their algorithms.
2. Your investment goals
You can have short-term goals, such as buying a car or long-term goals, including planning your wedding, funding your children’s education, and saving for your retirement. Robo-advisors allow you to set multiple goals and help you achieve those goals.
3. Your desired investment horizon
The duration for which you want to stay invested depends on your long-term and short-term goals. Staying in the market for longer allows you to ride out temporary fluctuations and benefit more from the effect of compounding.
Once the robo-advisors have the above-mentioned information, they then create and manage portfolios using a set of rules-based algorithms. This helps them set benchmarks (an ideal condition) and adjust your asset allocation based on market conditions and your overall investment objectives.
Robo-advisors typically invest in a diversified range of assets, such as stocks, bonds, exchange-traded funds (ETFs), and mutual funds, to reduce risk and maximize returns. The algorithms use historical market data and statistical models to forecast future market trends and optimize portfolio performance. Some robo-advisors also offer tax-loss harvesting services, a strategy that involves selling losing positions to offset capital gains and reduce tax liabilities.
Now that you understand how robo-advisors work, let us analyze why you may want to consider using them.
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6 benefits of investing through a robo-advisor
Robo-advisors are becoming increasingly popular among investors due to the benefits they offer, especially for those with limited investment knowledge or experience.
Here are the key benefits of managing investments with robo-advisors:
1. Robo-advisors are more cost-effective than traditional advisors
Robo-advisors typically charge lower fees compared to traditional financial advisors, making them an attractive option for individuals looking to manage their investments without incurring high costs. This is because robo-advisors use algorithms to determine the best investment strategies for their clients, cutting out the need for human intervention and expensive overheads.
2. Robo-advisors offer personalized investment advice
Robo-advisors use artificial intelligence and machine learning to analyze your financial goals, risk tolerance, and investment preferences. Based on this, they create a personalized investment portfolio that aligns with your objectives. This level of customization ensures that the investment advice is tailored to your specific needs, reducing the risk of making poor investment decisions.
3. Robo-advisors are easily accessible and convenient to manage
With robo-advisors, investors can easily manage their portfolios from their computers or mobile devices, eliminating the need for in-person meetings. This level of accessibility and convenience allows investors to manage their investments on their own terms, whether they are travelling, working, or simply don't have time for traditional financial planning methods.
4. Robo-advisors offer a high level of transparency
Robo-advisors provide investors with a high level of transparency by giving them access to real-time information about their investments. This includes detailed reports on portfolio performance, investment fees, and other important financial information. This level of transparency allows investors to make informed decisions about their investments and ensures that they are always aware of the status of their portfolio.
5. Robo-advisors remove the emotional aspect of investing
Robo-advisors remove the emotional aspect of investment decision-making, which is one of the main reasons why investors make poor choices. Robo-advisors are not swayed by market hype, panic, or euphoria. They instead follow a predetermined strategy, ensuring that investors stick to a disciplined approach that aligns with their financial goals. By removing emotional decision-making, robo-advisors can help you make better investment decisions and improve your chances of achieving long-term financial success.
6. Robo-advisors can help you create a diversify your portfolio through algorithms
Robo-advisors can create diversified investment portfolios using sophisticated algorithms that include a mix of assets, including stocks, bonds, and alternative investments, such as real estate, ULIPs, and gold, which align with the client's risk tolerance and investment goals. This diversification reduces the risk of investment losses and improves the chances of achieving long-term investment success.
Things to keep in mind while using robo-advisors
It is crucial to understand that robo-advisors are only as effective as the data provided to them. Therefore, ensuring that the data provided is accurate and up-to-date is important.
In addition, you must clearly understand your financial goals and risk tolerance levels before using a robo-advisor. This will help you give better inputs to the robo-advisors and allow them to tailor your investment portfolio according to your needs.
Further, you may want to review your investment portfolio periodically to ensure it remains aligned with your financial goals and risk tolerance. Finally, it is essential to understand that robo-advisors are not a complete replacement for human financial advisors. Investors must consider seeking professional advice when dealing with complex financial matters.
Alse see: 7 Signs You Need A Financial Advisor
Who should opt for robo-advisors?
Robo-advisors may be good investment management tools for individuals who are looking for a cost-effective, convenient, and low-risk way to manage their investments. They are particularly suitable for individuals who have limited experience in financial planning or those who do not have the time or resources to manage their investments actively.
Robo-advisors are also ideal for those who prefer a hands-off investment management approach and are comfortable delegating investment decisions to automated platforms.
Are robo-advisors good for retirees? Robo-advisors can help retirees stay up-to-date with the latest market trends and offer personalized support so that they can live a comfortable and stress-free post-retirement life.
However, it is important to note that robo-advisors may not be suitable for everyone, especially those with complex investment needs or requiring specialized financial planning advice. In such cases, the robo-advisor vs financial advisor debate resurfaces. Ultimately, the decision to use a robo-advisor depends on individual preferences, financial goals, and risk tolerance levels.
To conclude
Robo-advisors are cost-effective, offer personalized investment advice, are easily accessible, and provide transparency when it comes to making decisions. They remove the emotional aspect of investment decision-making, helping investors avoid making impulsive decisions based on short-term market movements. With the rise of robo-advisors, financial planning has become easier for many people who lack sufficient financial knowledge and experience, allowing them to achieve their financial goals seamlessly.
Use the free advisor match tool to match with experienced financial advisors who can explain whether robo-advisors are suitable for your financial needs and goals. Answer a few questions based on your financial needs, and the match tool will help connect you with 1-3 financial advisors that may be suited to help you.