Passive income: maybe it sounds too good to be true. After all, don’t you need to work harder to earn more money? It seems the answer is no – at least, not always! In fact, this ‘work harder’ mentality has led to a burnout epidemic, meaning many of us are exhausting ourselves as we strive to reach our financial goals.
However, there’s good news: earning money doesn’t have to be this challenging. If you want a more hands-off approach to investing, read on to learn how a so-called ‘robo-advisor‘ might help you earn some passive income.
What is a robo-advisor?
A robo-advisor is basically an automatic or automated investment tool. This unique software, based on algorithms, matches you with an investment portfolio based on your personal preferences.
- You choose an account type, such as a stocks and shares ISA or personal account.
- When you open an account, you’ll answer a few questions, such as how much you want to invest and how much risk you’re comfortable with.
- The algorithm selects investments that may suit your preferences, such as stocks, mutual funds or government bonds.
- You pay a platform fee (fees vary by provider).
Some accounts are completely automatic, meaning there’s no human oversight, while others do involve some human management.
Can robo-advisors help you make passive income?
Yes, they can. However, just remember that there’s always risk involved when you invest, and you might not get back what you put in. That said, here’s why a robo-advisor could help you earn passive income in the long run:
- It’s easy to get started, so there’s little upfront effort required from you.
- You might improve your chances of making passive income by diversifying your portfolio. Adding a robo-advisor account to the mix could help you do just that.
- The robo-advisor manages your portfolio, so you don’t need to worry about choosing or managing your own portfolio. This is great if you’re short on time or you’re busy managing other investments.
If your investments via a robo-advisor pay off, you’ll earn money by doing almost nothing, allowing you to focus your valuable time and effort elsewhere.
How do you open a robo-advisor account?
First, think about what you want from your account. Consider:
- What services you need from a robo-advisor;
- How much automation works for you (just because it’s a passive income stream doesn’t mean you have to be completely hands-off!); and
- What you’re willing to pay in fees for the services you want.
Are there downsides to using robo-advisors?
As with any investment opportunity, there are some drawbacks to using a robo-advisor for passive income.
- You might find there’s not much scope to personalise your investments.
- There’s always the risk of your investments dropping in value – using a robo-advisor doesn’t eliminate this risk.
- The fees can be high, although they’re usually less than you’ll pay for a human financial advisor.
Slightly unnerved by the idea of being ‘hands-off’? Don’t be. Some platforms, like InvestEngine, give you the option of managing your own DIY portfolio, so always compare options before applying.
Combat burnout with passive income
If you’re looking for a passive income stream to help you reach a financial goal, then consider using a robo-advisor. Although there’s no guarantee your investments will pay off, robo-advisors offer a unique, hands-off approach to investing that might suit your lifestyle.
- Consider your investment goals carefully before choosing a robo-advisor.
- Never invest more than you can afford to lose.
- Get financial advice first if you’re unsure whether services like robo-advisors or stocks and shares ISAs are right for you.
Ready to choose a robo-advisor? You can find a selection of providers offering these services over on our top-rated robo-advisors page!
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in the future. The content of this article is provided for information purposes only. It is not intended to be, nor does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.