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The Benefits of Using a Robo-Advisor for Investment
- Authors
- Name
- David Botha
The Benefits of Using a Robo-Advisor for Investment
Investing can seem daunting. The jargon, the research, the constant need to monitor your portfolio – it’s enough to make anyone want to simply leave their money in a savings account. But investing is crucial for long-term financial goals, and thankfully, there’s a more accessible and often more affordable way to do it: robo-advisors.
What are Robo-Advisors?
Robo-advisors are automated investment platforms that use algorithms to build and manage investment portfolios for you. They typically require you to answer a questionnaire about your financial goals, risk tolerance, and time horizon. Based on your responses, the robo-advisor will construct a diversified portfolio, usually consisting of low-cost exchange-traded funds (ETFs). They then automatically rebalance your portfolio to maintain your desired asset allocation.
Here's a breakdown of the key benefits of using a robo-advisor:
Lower Fees: This is arguably the biggest advantage. Traditional financial advisors charge a percentage of assets under management, which can be quite high (typically 1% or more). Robo-advisors typically charge significantly lower fees, often between 0.2% and 0.5% per year. This difference can translate to significant savings over the long term.
Accessibility: Robo-advisors open up investment opportunities to a wider range of investors. They often have lower minimum investment requirements compared to traditional advisors, making them accessible to those with smaller portfolios.
Diversification: Robo-advisors automatically build diversified portfolios, reducing risk by spreading your investments across different asset classes, such as stocks, bonds, and sometimes even alternative investments. This is crucial for mitigating risk.
Automatic Rebalancing: Maintaining your desired asset allocation is key to successful investing. Robo-advisors automatically rebalance your portfolio when your asset allocation drifts due to market fluctuations. This ensures your portfolio stays aligned with your goals.
Convenience & Ease of Use: Managing an investment portfolio doesn’t require constant monitoring. Robo-advisors handle the technical aspects, freeing you up to focus on other financial goals. Most platforms have user-friendly interfaces and mobile apps.
Tax-Loss Harvesting (Some Platforms): Some robo-advisors offer tax-loss harvesting, a strategy where they sell losing investments to offset capital gains, potentially reducing your tax liability.
Popular Robo-Advisor Platforms (as of May 2020):
- Betterment: One of the most well-known robo-advisors, offering a range of features and support.
- Wealthfront: Another popular option focused on automation and tax optimization.
- Schwab Intelligent Portfolios: Backed by a major brokerage firm, offering a straightforward and low-cost approach.
Important Note: While robo-advisors are a valuable tool, they aren't a magic bullet. It’s crucial to understand your own financial goals and risk tolerance. It's also important to remember that past performance is not indicative of future results.