If you’re late to the party, you may be coming across a new type of software online called a Robo-Advisor. Whether you are a current DIY investor or someone who is just looking to enter the markets, they can be an amazing tool to utilize.
A Robo-Advisor is essentially an automated process wherein the software determines an investment portfolio that works for you, and consistently balances your portfolio to always meet your requirements. How do they find your requirements? It can be as easy as a simple questionnaire. I am a passionate stock-picker, so I’ve never actually invested with a Robo-Advisor. But I decided for our most recent Wealthsimple review that I would create an account and actually go through the process of getting set up with one. In this piece, I’m going to explain some of the benefits of working with a Robo-Advisor and how they can save you time, stress, and most of all, money.
Robo-Advisors fees are ridiculously cheap
In almost all cases, picking your own stocks or ETFs is going to be the lowest cost choice for an investor. But the problem with this is you actually have to be skilled at picking them. I’ve seen lots of people who are fed up with paying ridiculous fees through their current bank or mutual fund. They decide to pack up shop and move their money elsewhere. They open up an account at a discount brokerage, park their money in the first 10 “top stocks” they see from an article on the internet, and lose their money.
Alright, it doesn’t always happen this way, but it happens far too often. So what is a simple solution for someone who is tired of paying the fees, but doesn’t have the knowledge to pick individual stocks? You guessed it, a Robo-Advisor. Lets compare the average mutual fund expense ratio of 2.4%, to the average Robo-advisors of .5%. On a $50 000 portfolio, you’re looking at $1200 in fees for the mutual fund, and $250 for the Robo-Advisor. Over time, this can create a substantial capital savings. In fact, Wealthsimple has a simple calculator on their website that will tell you how much you will save by switching to them.
I’ll do the work for you to make things easier. According to them, a $50 000 investment portfolio invested with them will save you more than $24 000 over the course of twenty years. A million dollar investment portfolio? Over half a million dollars! So, the next time you sit there debating whether switching is worth the 1.9% a year, just imagine twenty years down the road.
Robo-Advisors take the headache away
Like I said, I’ve always picked my own stocks. I view it as a pleasure more than a pain, though this isn’t the case for everyone. It is very time consuming having to manually balance your portfolio, check up on all the financial reports of the companies you invest in, and make painful buy/sell decisions, hoping you don’t regret them.
A Robo-Advisor takes all of this away. When I filled out some of the questionnaires for Robo-advisors here in Canada, I was completely amazed at how accurate the results were. Their portfolios reflected my views almost entirely. I would have full confidence transferring my money to these Robo-Advisors and letting them do the work for me. To have constant portfolio balance, and little to no human interaction with an investment portfolio can be a blessing to a lot of people. Investing manually requires careful management of human emotion, and as you probably know, this can be the downfall for many. Robo-Advisors don’t have emotions. They invest based on a pre-determined algorithm that you have set with your initial questionnaire.
Robo-Advisors are tailored to new investors
If you’re just starting out, you may not have a large amount of capital. Some mutual funds often require a minimum balance before they will even let you invest in the fund. Robo-Advisors have extremely low account minimums, some of them even go as far as to say you are free to deposit whatever you wish. This reduces the barrier for entry to someone who just wants to get started.
Another benefit to a new investor who one day wants to go down the path of individual stock picking is the fact it can create a stop-gap. If you aren’t comfortable picking individual companies to invest in right now, instead of making a rushed decision to enter the market due to the fear of missing out, start with a Robo-Advisor. While you are learning the every day intricacies of the stock market, your advisor is currently building your wealth. When you finally decide you are ready to take that leap of faith, you can pull the money out and move it to your own personal account.
Should you use a Robo-Advisor? You should at least consider it
All in all, there is a multitude of reasons why you should at least consider switching to a Robo-Advisor. For one, we all like money. If you could get a credit card with all the same perks at a lower interest rate, you’d easily make that switch. So why not think about it with your investment portfolio?
Robo-Advisors aren’t perfect, but they are doing one thing pretty close to it. Appealing to a crowd that has been left in the dark for years now. It is a statistical fact that Millennials are not investing in the stock market. In my opinion, it’s simply due to the fact they don’t know what to do with their money. They leave their money in their high interest savings account, earning often lower than 1% a year. Or, they head to their bank and slap it in whatever fund the bank recommends, and they pay the fees.
This isn’t the case anymore. Robo-Advisors are welcoming people who have no knowledge of the stock market with open arms. And they are doing it for ridiculously cheap. If there is one thing to be said for certain about Robo-Advisors, it’s that their future growth is almost guaranteed, as people are getting tired of bleeding money.
This post is courtesy of Dan Kent, he is a writer and co founder of Stocktrades.ca. A DIY investor for 7 years now, Dan has a combination of dividend, growth and real estate investments in his portfolio and is looking to continually grow his net worth. You can check his website out at stocktrades.ca or follow him on Twitter at @Stocktrades_CA.