Over the last couple of years, we’ve seen an increase in robo-advisors popping up everywhere. Wealthfront and Betterment were the first two companies to deploy robo-advisors, more than a decade ago now. Today, more than a dozen robo-advisors have entered the market. From banks to private companies, everyone wants a piece of the robo-advisor market. Young adults are beginning their investment journey using robo-advisors, and here are 7 reasons why you should too!
What is a robo-advisor?
A robo-advisor is automated computer software for financial planning that requires limited human supervision. Based on your answers to a few questions about your risk tolerance, the amount you wish to invest, and for how long, it helps you invest your money and build the right portfolio for you. You don’t have to worry about asset allocation, diversification or even rebalancing, as the robo-advisor will create the most balanced portfolio, based on your needs.
#1 Build a portfolio made for you
As previously mentioned, a robo-advisor analyzes your financial and investor profile based on the answers to a couple of questions. It then finds the best investment portfolio for you based on your risk level. For example, let’s say you are a conservative investor, meaning you prefer low-risk investments.he robo-advisor will invest your money in a lower risk security portfolio. Some examples are government bonds, cash investments, and high-dividend stocks. If, on the other side of the spectrum, you’re an aggressive investor, meaning you prefer high-risk investments, the robo-advisor will then invest your money in a high-risk security portfolio. Some examples are US or Canadian tech stocks. Lastly, a balanced portfolio includes a mix of bonds and stocks.
#2 You don’t need to be an expert to start investing
Investing in the stock exchange doesn’t mean you have to be a financial expert. Today, with the use of a robo-advisor, you can invest in stocks with very limited
knowledge of finance. A robo-advisor will analyze all types of investments, like bonds, stocks, ETFs, etc. for you and create a balanced and personalized portfolio based on your objectives (purchasing a home, retirement, travel, etc.) Investing with a robo-advisor is also great for people who want to invest their money but don’t know where to start. Once you gain more experience with investing using a robo-advisor and have the time for it, transitioning to an online broker may be a better option. It gives you more control over your investment.
As a first-time investor, navigating through the different investment types can be overwhelming. A robo-advisor will sort out the best type of investment for you based on your preference and your investor profile. They eliminate the stress related to picking the wrong investments based on your investor risk profile and provide peace of mind.
#3 This is the lowest-cost investment option
Robo-advisors’s fees are relatively cheap. Three fees are associated with robo-advisors, the management fee, the estimated transaction fee, and the Management Expense Ratio (MER). Some companies add all their fees into the Management Expense Ratio . The MER is the fee associated with investing your money in the different asset classes used to build your portfolio. It may vary between 0.05% and 0.7% annually, or between $5 to $70 for every $10,000 invested. Read your terms carefully to know your investment fees. Some management fees may vary based on the asset class in which you’re investing (like stocks or bonds). One way to estimate your Management Expense Ratio is to use the Hardbacon comparison tool. Based on the service you selected and the amount invested, you can quickly see the fees associated with your robo-advisor.
#4 The earlier you invest, the greater your return on investment
The concept of “the earlier you start investing, the greater your return will be” is not new. Let’s take an example; you are 25 and you want to start investing your money for your retirement. You start with a one-time payment of $1000 with an annual contribution of $10,000. You invest it in a balanced portfolio with a constant return growth of 5%. By the time you’re 60, you’ll have accumulated an average final portfolio value of $908,719.09.
It’s never too late to start investing, but if you have to choose, the earlier the better. The best time to start investing was yesterday!
#5 You can invest any amount
Robo-advisors are a great tool to use when you start investing because it doesn’t require a large amount of money. Depending on the robo-advisor you select, some may require a minimum amount of investment but some don’t. Between rent, accumulated school debts, and other expenses to cover, investing some money on the side is harder than it looks. Luckily with a robo-advisor, you can invest a one-time payment at the beginning and watch it grow over the years, or even add smaller payments periodically or whenever it is more convenient for you. When you add any amount to invest with a robo-advisor, you don’t need to worry about where to distribute it across your different accounts, as the robo-advisor will do it for you. It will make sure your investment is balanced, at all times, across your different investments.
#6 Helps you invest in your goals without having to worry about your investments
As an individual investor, spending hours every day making sure you’ve selected the right investment while keeping a balanced portfolio at all times is very common if you don’t have a financial advisor guiding you. As a beginner, spending this much time while investing can be frustrating and overwhelming for some. Using a robo-advisor, you barely need to look at your account. With your objectives, the amount invested, and your risk preference in mind, the robo-advisor will take care of everything for you. The robo-advisor provides a predicted amount that you should receive at the end of your term. Based on that, you’ll have a pretty good understanding of your return on investment without having to worry about it. All you need to do is relax and let the robo-advisor work for you and help you achieve your financial objectives.
#7 Act as an educational tool
As a first-time investor, starting out with a robo-advisor can be a great choice because it gives you some type of educational support. Like previously mentioned, you can start investing without any previous knowledge about finance or investment. There is really no better way to become more confident and knowledgeable about investing than by starting your investor journey. You don’t need to jump all at once and invest a large amount of money with a robo-advisor. Dip your toes first, invest a small amount and see what happens. Look exactly where the robo-advisor is investing your money and the amount invested in each portfolio. You can then do an external search to learn about the stock or bond your robo-advisor has selected for you. It’s a great opportunity for you to learn about the stock market and understand economic fluctuations. You can also change your risk preference once in a while and see what happens and how the robo-advisor changes your portfolio. Your 20s are the best time to make mistakes and learn from them, and your investments can be one of them.
To conclude, a robo-advisor is a great tool for any first-time investor. Your 20s are a golden time to start investing. It can help you achieve your financial objectives (retirement, purchasing a home) and try out different investment strategies. You have time to learn, grow, and earn it. Robo-advisors are a great way to start your investment journey with a very small amount while paying very little fees for the service. It acts like your personal investor assistant, which helps you pick the right investments and manage them over the period you selected. Once you gain more knowledge about investing and stock markets and want more control over your investments, then it’s time for you to look into using an online broker.
Are you ready to begin investing with a robo-advisor but you’re unsure which to choose? We invite you to visit our robo-advisors comparison tool to help you pick the best robo-advisor for you!
This article was compiled by Hardbacon, which has designed a online broker comparator listing dozens of Canadian online brokers. Hardbacon also helps you save on savings accounts, chequing accounts, credit cards, robo-advisors, life insurance, mortgages and personal loans. If you want to go one step further and take control of your finances, you should download Hardbacon’s mobile app, which links to your bank and investing accounts, helps you plan for your financial goals, create a budget and invest better.