Could a robo-advisor be the right type of investment account for you.
Robo-advisors are an investing tool that manages your money for you. You can opt to open an account with a robo-advisor instead of with 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 an account is the ideal way for you to invest.
1. You don’t enjoy researching investment options
If you invest with a brokerage firm, you have the responsibility of reviewing the mix of different investments available and building a diversified portfolio. But if you work with a robo-advisor, this is handled for you. The robo-advisor asks you some simple questions and then uses algorithms to select the right mix of investments.
Your money is invested automatically and you don’t have to do much at all, so you can spend essentially zero time managing your portfolio once you get started.
2. You don’t feel comfortable managing your own money
Some people are intimidated by picking investments and it can hold them back from putting their money into 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.
Signing up for an account is usually really easy, and you’re asked questions in plain language about your goals so the robo-advisor can take over managing your portfolio for you. Many robo-advisors even use techniques such as tax-loss harvesting that aim to minimize your tax liability.
3. You aren’t sure how to figure out your risk tolerance
It’s important to have the right mix of investments given your tolerance for risk. That’s because there’s often an inverse relationship between the risk of loss and the potential for high returns. You need to know what level of risk you’re comfortable taking on, given your age and investing timeline, if you’re going to manage investments yourself.
If you aren’t sure how to assess risk and decide on an appropriate asset allocation, a robo-advisor takes the guesswork out of this process. It puts together an ideal investment mix for you based on questions it asks about your investing timeline and willingness to take chances in exchange for potentially bigger rewards.
4. You’re unlikely to rebalance your portfolio over time
Over time, you should monitor the mix of investments in your portfolio and make changes if necessary.
You need to do this as you get closer to relying on your investments for income and have less time to wait out market downturns. If some of your investments outperform or underperform, rebalancing is also important to make sure you don’t have too much exposure to any one type of asset class or market sector.
Many people don’t rebalance their portfolios often enough, though, and they end up with a portfolio that’s either too conservative or too aggressive. If that’s likely to happen to you, you may be better off using a robo-advisor which rebalances your account for you.
5. You don’t mind paying a small fee for convenience
Robo-advisors charge a small fee for their services. It’s lower than the fees you’d pay for professional investment advice, but it still reduces the returns you earn over time. You’ll need to consider if you’re willing to pay this fee in exchange for the convenience of not having to manage your own investment portfolio.
By considering all your options, thinking about your investment knowledge, and researching different robo-advisory fees, you can make the decision about whether a robo-advisor is the right choice for your needs.