What is a robo-advisor?
Robo-advisor is the term used for digital investment accounts and platforms that are managed by algorithms rather than people, hence the ‘robo’.
Unfortunately a robo-advisor does not mean you get your very own robot mentor. But you do get the next best thing – a simple way to invest your money.
Different accounts that fall under this category will be managed in various ways. Some are completely automatic whereas others might involve some human oversight.
How does a robo-advisor work?
These robo-investing platforms work by automating as much of the investment process as possible using computer software. This is why they can be an affordable way to have a managed multi-asset portfolio.
The robo-management of these accounts involves quite a few cool tricks. This includes things such as automatic portfolio rebalancing, investment allocation adjustment to meet your risk tolerance, and the ability to alter your investing approach based on your changing circumstances.
Using a robo-advisor usually means that you can get help with organising your investments without the high price tag that usually comes with such services.
Are robo-advisors good for beginners?
Robo-investing may be good for beginners due to its simplicity. Often, you just need to select the level of risk you’re comfortable with and how much you’re able to invest. Then you just let your robo-advisor do its thing. However, its simplicity cannot hide the potential need to obtain appropriate advice nor should it cloud your understanding of the risks associated with investing.
You can always switch from a robo-advisor platform to a conventional brokerage account at a later stage if you’d like to have greater control over the assets (funds, shares, etc.) you’re investing your money in. But if you’re just starting out, there’s very few simpler ways of investing than getting a robo-advisor to pick and manage a portfolio for you.
What should you consider when choosing a robo-advisor?
Here are some key things you should consider before selecting a robo-advisor to invest with:
- Does the platform come from a reputable brand?
- How do their costs and fees compare to competitors?
- Does the performance history of their funds stack up against similar robo-advisors?
- Is the platform easy to use?
- Do they offer a mobile app for managing your account?
- Can you automate your investment payments?
- How much flexibility and choice do they offer?
- Can you use tax wrappers like a stocks and shares ISA?
How much money do you need for robo-investing?
How much money you need will all depend on which platform you decide to use. Some robo-advisors will let you begin investing with as little as £1. But other platforms can require much higher starting deposits.
So if you only have a small amount to begin investing with, it’s worth checking out the different robo-investing platforms to see which might be the best fit for you.
You can always change robo-advisors as your wealth grows (or if it doesn’t). So don’t be afraid to start small and then adjust your auto investing platform at a later time.
Is it possible for robo-advisors to beat the market?
It’s possible for robo-advisors to beat the market but it’s not common. Each provider has their own strategy for making money from your investments so whether or not your investments beat the market will be partly down to the platform you choose.
Most robo-advisors tend to hold index funds as a key component of their portfolios, which would make beating the market unlikely if they track the market! However, some platforms will let you hold a mixture of assets. This diversification can help to reduce any potential losses when markets aren’t in great shape.
The level of risk you take could also play a role in whether you beat the market or not. Taking on more risk may give you a better chance of beating the market. However, it could also lead to bigger losses if the investments don’t work out.
Do keep in mind that very few funds or even professional investors typically beat the market on a consistent basis.
Can robo-advisors make you money?
Robo-advisors can definitely make you money, as can a lot of things if you get it right. However, it’s important to take into account the fact that they can’t control or predict the movements of markets which can go up or down, especially in the short-term, and as such you must remember that your capital is at risk and past performance is not a reliable indicator of future performance
You also have to remember that you’ll be paying a fee that will cut into your profits.
How much money you will make will depend on a number of factors such as: how much you’re investing, how long you’re investing for, and how adventurous/risk averse you are with your investment choices. Then, there are certain areas that are out of your control which will play a big part, such as the wider economy and individual performances of businesses.
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