The rise of robo-advisors and automated investing has helped many investors in recent years with portfolio management. These are new types of investment technology, often incorporating AI in finance and certain types of financial algorithms to create digital wealth management tools — often just called “robo advisors” — that effectively put investing on autopilot.
While you may or may not be interested in using a robo-advisor to help with your investments and portfolio management, it can be helpful to at least know what they are, how they work, and how thy migh t be helpful in investment strategy automation.
What is a robo-advisor?
A robo-advisor isn’t a type of robot, but instead, is a type of investing technology that utilizes algorithms and sometimes AI tools to help generate portfolios for individual investors. Investors all have different preferences and goals — think about things like your risk tolerance, time horizon, etc. — and a robo-advisor can take those things into consideration, consider the risks in the market, and then produce a model portfolio.
So, while it’s not a robot, it’s a type of digital service that many brokerage firms offer their clients. In a way, they are an alternative to a financial or investment advisor, and instead automate the process to save on manpower and keep costs down. Again, it all depends on the individual investor’s preferences and concerns, and what’s happening in the economy and the market.
There can be many factors at play, and instead of stressing out and trying to figure out the ideal portfolio or asset allocation, robo-advisors do it for you. It’s all about automation — which is why the “robo” moniker is used.
Using a robo-advisor in automated investing
All sorts of different financial firms use robo-advisors, and they’re all likely to be different under the hood. That’s to say that if you use a robo-advisor at one investment firm, it’s probably going to function a bit differently than a robo-advisor at a different firm. The results may be similar, however.
As discussed, a robo-advisor compiles a bunch of different pieces of information to form a strategy, and then can create an investment portfolio that matches or aligns to that strategy. This saves an investor time and money.
As for how to use one? Most of the time, investors will fill out a questionnaire using an app or online. Those questions are likely to dig into your goals, your financial situation, and more. It’ll also need to know how comfortable you are with varying degrees of risk, and what types of returns you’re hoping to see — and when.
From there, an investor hits the button, and the robo-advisor gets to work, creating a portfolio for you — again, this is automated investing, and robo-advisors can make it all easier. In theory.
That’s important to keep in mind: Robo-advisors aren’t foolproof, and there’s no guarantee that they’ll get you what you want. But again, it’s important to know in broad terms what they are and how they work.
Check out the Money Vehicle textbook — you can find it here on Amazon. And if youlike what you see, you can get more content sent directly to your inbox! Sign up for the Money Vehicle Movement Newsletter!
And check out our white paper: “Strategies for Increasing Financial Literacy Rates Among High School and College Students”
More from Money Vehicle:
