The way we invest can already be automated due to advancements in technology. This is where robo-advisors come in handy. They allow more people to have a shot at investing in stock markets through low-cost, automated options. The services robo-advisors provide include a portfolio that’s tailored to your needs, driven by algorithms built and managed by financial professionals. Due to automation, people can access professional investment advice while paying less.
But really, how do robo-advisors work? Also known as online advisors or automated investing services, this tech uses computer algorithms and advanced software to build and manage your investment portfolio.
However, this innovation can bring about complications and lapses in your overall investment strategies if not handled or used properly. One way to get informed on how to use this technology is to educate yourself regarding its downsides. That said, here are some common misconceptions about using a robo-advisor and how it may serve you wrong.
While a robo-advisor can save you time, effort, and money, their services may be limited and not wholly target your needs. This is why you shouldn’t put all your eggs in the robo-basket. Like in traditional investing, you must diversify your assets across different types of investments and asset classes, such as real estate and commodities to name a few.
Furthermore, robo-advisors may have a limited view of your financial picture. Since these are automated services, their algorithms might leave out other vital aspects of your financial profile. For a more holistic approach, service providers must consider putting customers’ financial planning separate from portfolio management to give robo-advisors additional information to work on. In turn, they can provide more tailored solutions based on the customers’ profiles.
Most robo-advisors allow you to change your risk profile, and you might be tempted to do so even at a loss. Changing your risk profile means switching your fund allocation to a seemingly less risky alternative. For example, your current fund allocation is 90% stocks and 10% bonds; and you decide to switch to 40% stocks and 60% bonds based on the advice coming from your robo-advisor.
However, you must still do your own analysis as to whether this recommendation will be to your advantage. Because when you decide to change your risk profile without properly doing the necessary analyses, you might be selling your stocks at a loss and buying bonds during a market crash. And that whole “buying high, selling low” scheme is a hard way for you to make money.
Investing and building your own portfolio boils down to your risk profile, mindset, and financial goals in the long run. During unprecedented times like a health crisis, we acknowledge how challenging it may be for some to stay invested because they choose to allot funds for emergencies and other priorities.
Go back to the reason why you decided to invest in a robo-advisor experience, and do your research and regular analysis to retain or improve your current strategies. Look forward, and be patient.
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