What is Automated Investing and Why You Should Try It
13 April 2022
4 Mins Read
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As a new retail investor, the chances are that you have made one of two choices: either trying to navigate the world if investing alone or hiring an expensive financial advisor. But today, there is a third choice available to newcomers and seasoned investors alike.
Automated investing offers you the chance to build a professionally-managed, intelligent portfolio at a fraction of the cost, while also limiting investment risks.
Looking to secure a piece of the stock market pie? Here’s how Robo-advising works – and why you should try it in 2022.
What is Automated Investing? Here’s How Robo-Advising Works
Emerging technologies are redefining a range of industries – and the world of investing is no exception. In 2022, the assets managed by Robo-advisors have reached a total market value of nearly $1.8 million, which is expected to grow at a CAGR of over 14% through to 2026 and beyond.
And, as retail investors warm up to Robo-advisers, the number of US users opting for this choice has grown to over 3.5 million in 2021 – a 23% increase since 2020!
But what is automated investing, and how does it work?
Automated investing refers to investing capital through digital platforms that leverage computer algorithms to generate a custom financial and investing strategy for the user. Robo-advisors take into account the investor’s goals, risk tolerance, and other variables like income and age.
In practice, an automated investing project starts with the user filling in an online survey and adjusting factors like the amount to invest, risk tolerance parameters, and aims. The Robo-advisor will review the user’s preferences and recommend a set of investments to limit risks, maintain balance in their portfolio, and maximize gains.
Ultimately, automated investing eliminates the need for investors to hire a professional to manage their portfolios.
The Reasons Why Automated Investing is Worth Trying in 2022
Today’s user-friendly trading platforms have made it easier for retail investors to bet part of their capital on a rising stock or new cryptocurrency. But when you are looking to craft a long-term investment strategy, a DIY approach might not be the best choice, especially if you are not an expert trader. Here’s how automated investing can help.
1. Diversification, Risk Management, and Auto Rebalancing Features
If you are torn between hiring a money manager or diving in without professional help, Robo-advisors can offer you the best of both worlds.
Automated investing is still extremely user-friendly, but it leverages an innovative underlying framework called Modern Portfolio Theory (MPT) to diversify and optimize an investor’s portfolio over time.
Firstly introduced by Nobel prize winner Harry Markowitz in 1952, Modern Portfolio Theory (MPT) is a mathematical model that regularly analyzes an investor’s portfolio and adjusts it to maximize gains given a certain risk level.
While this does not take all risks off investing, it allows you to automatically diversify your investments and rebalance your asset accordingly to market fluctuations.
2. Limited Investing Fees
Traditional financial advisors would require you to afford an hourly fee which, depending on their experience level and location, can vary between $150 and $400. And, even if you can afford their services, these costs can eat into your investable capital.
Automated investing is a much more affordable alternative. Depending on your provider, fees are calculated as a percentage of the capital invested which might vary between 0.20% and 0.30%. So, for each $1000 invested, your Robo-advisor fees will amount to $2-3.
What’s more, the minimum capital necessary to access the services of a Robo-advisor – if any – can be as low as $10!
3. Always Accessible
A traditional advisor might only be available during office hours or according to their own schedule. In turn, this can affect the speed and efficiency of your trades – and, in the case of sudden market fluctuations, even miss out on significant capital gains.
Oppositely, Robo-advisors use interactive interfaces and digital platforms, which allow you to access your portfolio and ask for help around the clock.
4. Growing Levels of Personalization
While Robo-advisors made their debut in 2008, automated investing is still an emerging technology in its infancy. In turn, new features are tested and introduced every day. Today, investors can benefit from increased levels of personalization.
And, while you might not be able to individually pick the stocks to invest in, you can set your goals and edit your risk parameters. All this, without being affected by the human bias that often influences the decisions of a human advisor.
A Smarter Option for Newcomers
Whether you are an inexperienced trader or a younger investor, you might not feel confident investing without the help of an advisor.
However, the minimum capital you need to have to access their services ($100,000 to $5 million) and steep hourly fees might prevent you from getting the experienced help you need.
Robo advisors are more affordable and more accessible than traditional advisors, but just as user-friendly as trading platforms. A win-win for newcomers!
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