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Monday, April 22, 2024

Automated Investing And How To Use It

Automated investing refers to a tool that automatically puts the money you wish to invest and creates your investment portfolio on the basis of certain yardsticks you choose. Essentially, it means that you use digital platforms that allow you to make pre-programmed investing and trading decisions. This is done on the basis of the data you add to the platform. Factors such as age, income, goals, and risk tolerance need to be considered when deciding how much one needs to invest and what the investment frequency should be. This is an important part of putting the parameters in place. Once this is done, the algorithms will invest your money automatically. Such robo-advisors are known to be cost-effective ways to structure your fxtm investment portfolio. 

What Is a Robo-Advisor?

Robo-advisors refer to digital platforms which allow automated, algorithm-driven services for financial planning. There is almost zero human intervention in this process. In general, the robo-advisor will ask you to fill in some survey questions online to assess your financial situation and goals for the future. On the basis of this data, the robo-advisor offers advice and make investment decisions on your behalf. 

The finest robo-advisors allow easy account setup, have a solid goal planning system, account services, and portfolio management. In addition to these, the customer can also get access to security features, make the most of prompt customer service, comprehensive education, and low fees.

The technology is not new, in fact it goes back to the 2000s where automated portfolio allocation software has been in use for wealth management. However, it was only after robo-advisors were launched that retail investors could use the technology directly. Prior to this, whoever wanted to make use of this innovation had to do so by hiring a financial advisor. 

In the present scenario, a majority of robo-advisors work with passive indexing strategies that are further optimized with the help of a version of modern portfolio theory (MPT). Certain robo-advisors also allow optimized portfolios for socially responsible investing (SRI), Halal investing, or tactical strategies that replicate hedge funds. Another key aspect of this is that it manages rather complicated tasks like tax-loss harvesting, investment selection, and retirement planning. 

Over the years, the industry has experienced monumental growth. These robo-advisors had managed client assets worth $1 trillion in 2020 and the number is predicted to go upto $2.9 trillion by 2025. 

Portfolio Rebalancing

A large number of robo-advisors use modern portfolio theory or another variation of it to create passive, indexed portfolios for their clientele. Once this gets established, robo-advisors carry on and monitor the portfolios to make sure that asset class weightings are at their optimum level and maintained even after there are movements in the market. 

Robo-advisors are able to get this done with the help of rebalancing bands.

Each asset class, or individual security is allotted a target weight along with a coinciding tolerance range. For instance, an allocation strategy could require one to hold 30% in emerging market equities, another 30% in domestic blue chips, and the remaining 40% in government bonds with a window of ±5% for every asset class.

Taking the help of rebalancing bands implies that emerging market and domestic blue-chip holdings could move between 25% and 35%. About 35% to 45% of your portfolio need to be set aside for government bonds. When a holding’s weight moves beyond the allowable band, the portfolio gets rejigged to depict the target composition that was there at the beginning. 

Choosing a Robo-Advisor

In case you find that automated investing is a great option for you, make it a point to learn more and research various robo-advisors and select the one that suits your requirements the most. 

A few points that you should take into consideration are management fees, service offerings as well as if your platform uses static rebalancing strategies which helps in maintenance of the options you picked before. It may even be useful in offering a more flexible artificial intelligence as well as offer an advanced machine learning algorithmic approach. 

A good robo-advisor will cut down the chances of your trades getting affected by human biases. Instead it will help you work your way around the stock market so you’re able to reap profits. 

Benefits of a Robo-Advisor

  • The key advantage of having a robo-advisor is that they’re more cost-effective than traditional advisors. By taking human effort out of the equation, online platforms are able to offer you those very services but at a better price. 
  • Accessibility is also a main advantage of robo-advisors. They’re available round the clock as long as you have a stable internet connection. Additionally, it requires much less capital to start your investment journey. The minimum assets needed to register for the account are usually in the hundreds to thousands. 
  • Efficiency is another aspect of these online platforms. Rather than calling or meeting with a financial advisor to carry out your trade, you can go through the process on your own transactions in a few clicks. 

To look at the disadvantages, robo-advisors will cut down the options you may be able to use as an individual investor. For instance, you will not be able to choose which mutual fund or ETF you’re invested in and you cannot buy individual stocks or bonds in your account. But it may be as good as buying individual stocks to make an attempt to beat the market.  

Drawbacks of a Robo-Advisor

With robo-advisors in the picture, some traditional barriers between the world of finance and everyday customers have been broken. Thanks to these online platforms, everyone can access sound financial planning. You do not have to be an individual with high-net worth to be able to do so. 

Yet, several people in the industry remain concerned about how viable these robo-advisors are as a one-stop-shop of sorts when it comes to wealth management. Robo-advisors have also been heavily critiqued for not being empathetic enough and not being sufficiently sophisticated. 

They can be used as great entry-level tools for those who operate a small account and do not have enough investment experience. If you want advanced services such as estate planning, complicated tax management, trust fund administration, and retirement planning, you may be disappointed. 

Ahsan Khan
Ahsan Khan
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