The world of investing can be very daunting, particularly to those with limited financial knowledge. Yet, some will still need to grow their money. One solution that may be attractive, therefore, is automated investing, which outwardly offers to simplify investing to help yield good returns.
However, is automated investing through the use of a roboadvisor (as automated investment platforms are commonly known) too good to be true? Is automated investing a good idea at all? Here, we look to answer those questions by defining what automated investing is as well as highlighting its pros and cons. In doing so, you should be able to make a balanced and informed decision as to whether it is a suitable option for you, depending on your circumstances.
What is automated investing?
Automated investing is a platform that seeks to take care of all your investment decisions for you, with minimal human contact. In practice, this means that roboadvisors offer a financial planning service which collates your information and financial targets. The technology is used then to invest your cash in the most efficient and suitable way possible. The roboadivsor or automated investment platform does so automatically through a piece of algorithm powered trading software.
What are the benefits of automated investing?
There are several benefits to automated investing, which can make it an attractive prospect for those wishing to grow their pension pot or any lump sums to make up any shortfall in their retirement budget.
There is no denying that using automated investing is easy. The whole process is designed to simplify your investment decisions and choose the right strategy and asset allocation suitable for your circumstances. Right from the beginning of the process, you should find that using automated investing services is a streamlined procedure. It will all, invariably, take place digitally from account opening right to making your very first investment.
- Low fees
Due to the lack of human involvement, and the speed with which a roboadvisor can work in addition to the sheer amount of portfolios that can be managed simultaneously, the fees surrounding automated investing are consequently very low. If you are trying to make the most of your money by making it stretch as far as possible, the low fees can be a significant selling point for automated investing.
- Low required deposit
Many savings accounts or investment platforms require a deposit. The amount needed can sometimes be too high for some people. Automated investing often only requires a low initial deposit to start trading on their behalf. For those with a small amount of cash available, that still needs to grow, this can be especially advantageous.
What are the drawbacks of automated investing?
Despite having some of the best technology behind it, automated investing does have its drawbacks of which every potential investor should be aware so they can make a fully informed decision as to its suitability.
- Human vs computer
Perhaps the most obvious drawback to automated investing is the fact that it is automated. Despite the considerable advancements in investment technology in recent years, it is still enough to make you uneasy to think that a computer can manage your money - and do it competently. While humans are prone to error, they can also think in ways that a computer with an algorithm cannot. There is, therefore, always the worry that something may have been missed due to a failing in the technology.
- Lack of autonomy
While investment algorithms are exceptionally advanced and complicated, they are still an automated procedure for a computer to follow. The result is that you are putting your cash somewhere that you will have little discretion over how and where it will be invested. Not only do you have to put a great deal of trust in that algorithm, but you also give up many investment freedoms that running your portfolio yourself can give you. A lack of quick thinking, dynamic investment is just one.
Automated investing - key takeaways
The benefits of automated investing are certainly very appealing. Being able to access a product that acts like a financial advisor as well as a portfolio manager is an attractive prospect. The simplification of investing that a roboadvisor can provide also takes out any confusion or worry that you may have made the wrong investment choice which can have serious ramifications on your future.
However, even the most intelligent algorithm can get things wrong at times, so the algorithm can also make an investment choice which will have negative implications on your investments. Sadly, therefore, knowing whether using a roboadvisor or automated investing is the right investment decision for you will depend on your circumstances - just like any other investment decision you make.