Could a Robo-Advisor be the right type of investment account for you.
Robo-advisers are an investment tool that manages your money for you. You can choose to open an account with a robo-advisor instead of a traditional brokerage firm if you want to take a hands-off approach to investing for the future.
But is a robo-advisor the right choice for you? Here are five signs that using this type of account is the perfect way to invest.
1. You don’t like to research investment options
If you invest with a brokerage firm, it is your responsibility to consider the mix of different investments available and to build a diversified portfolio. But if you are working with a robot advisor, this is handled for you. The robo-advisor asks you a few simple questions, then uses algorithms to select the right mix of investments.
Your money is invested automatically and you don’t have much to do, so you can hardly spend any time managing your portfolio once you get started.
2. You don’t feel comfortable managing your own money
Some people are intimidated into choosing investments and it can prevent them from putting their money on the market. This limits your potential returns and makes it harder to build wealth. But with a robo-advisor, you don’t need to learn how to navigate a brokerage firm’s platform or execute trades.
Creating an account is usually very straightforward, and you are asked questions in plain language about your goals so that the robo-advisor can take charge of managing your portfolio for you. Many robot advisers even use techniques such as tax loss harvesting that aim to minimize your tax liability.
3. You don’t know how to determine your risk tolerance
It’s important to have the right mix of investments given your tolerance for risk. This is because there is often an inverse relationship between the risk of loss and the potential for high returns. You need to know how much risk you are comfortable taking, given your age and your investment schedule, if you plan to manage your investments on your own.
If you don’t know how to assess risk and decide on an appropriate asset allocation, a robotic advisor takes the guesswork out of this process. It sets up an ideal investment mix for you based on the questions it asks about your investment schedule and your willingness to take risks in return for potentially greater rewards.
4. You are unlikely to rebalance your portfolio over time.
Over time, you should monitor the composition of the investments in your portfolio and make changes if necessary.
You need to do this as you get closer to your investments to generate income and have less time to wait for market downturns. If any of your investments are outperforming or underperforming, rebalancing is also important to ensure that you are not overly exposed to any type of asset class or market sector.
Many people not rebalance their portfolios quite often, however, and they end up with a portfolio that is either too conservative or too aggressive. If this is likely to happen to you, you might be better off using a robo-advisor who rebalances your account for you.
5. You don’t mind paying a small fee for convenience.
Robo-advisers charge a small fee for their services. That’s less than the fee you would pay for professional investment advice, but it still lowers the returns you earn over time. You will need to determine whether you are willing to pay these fees in return for the convenience of not having to manage your own investment portfolio.
By considering all of your options, thinking about your investment knowledge, and researching different robo-advisory fees, you can decide if a robo-advisor is the right choice for your needs.