Breaking Down Robo-Advisers And Understanding Your Investments #Hotline
Please remember this is not financial advice!
In today’s episode, we answer a question from Kathleen. She started her investment journey using robo-advisers, but isn’t sure what she’s investing in and wants to take more control in building her portfolio.
💥 Today on The Wallet:
1️⃣ Investing is for everyone and thanks to the increased popularity of investing apps, it’s never been easier to get started. Today, we’ll take a step back and look at why, when and how to invest in the stock market.
2️⃣ You might be familiar with the term “robo-adviser” when talking about investing, but what does this actually mean? We break down their pros and cons, what they do, and things you should consider when looking for an investment platform.
3️⃣ To help answer Kathleen’s questions, we explain how to understand what funds you are invested in, how to set your level of risk, and next steps for when you’re comfortable with robo-advisors.
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why invest?
The key reasons to invest your money are for long-term financial security and to build your wealth. Simply put, having your money stashed away in a savings account just won’t make it grow.
We tend to recommend that you invest for the long-term because it’s the best way to ride out market fluctuations. By long-term, we mean for at least 5-10 years.
Day trading is very time-consuming, often difficult, and highly risky. If you want to, you can always try and day trade with a small amount of your money, but we strongly suggest you focus on the long-term overall.
Historically, when we wanted to invest money, we’d have to work with an (often expensive or only working with people with lots of money) financial adviser, who would have their own platforms and would invest your money on your behalf. You can still take this route, but we’ve seen an ever-popular increase in online investing platforms that take a slightly different approach.
robo-advisers explained
A robo-adviser is an online investment service that asks you about a series of questions (usually 15 simple or so), and then puts your money into a basket of investments. Remember: is not an individual that personally knows you! It works off an algorithm.
Robo-advisers usually take a passive investing approach, however, they can sometimes also include some active investing— for an extra charge (which are usually still more affordable than financial advisers).
When robo-advisers invest on your behalf, they use a strategy called that is based the Modern Portfolio Theory (MPT). This means that it follows funds and prioritises diversification. The theory essentially focuses on maximizing the return investors could get in their investment portfolio considering the risk involved.
The robo-advisers put together a portfolio of low-cost funds — this could be index funds or ETF’s, for example — and spread your investments across different assets.
When you buy funds, you get exposed to a performance of a much bigger market. With investing in funds with a robo-adviser, you get a low-cost diversification while not trying to beat the market.
Remember that over time, passively managed index funds tend to outperform actively managed funds.
When choosing a robo-adviser platform, some things to consider are: 1) the fees eg. management fees, subscription fees, etc., 2) the exact services they offer and types of accounts managed, and 3) whether they offer any human advice.
You also need to make sure that the platform you choose is regulated by the FCA and protected by the FSCS.
Understanding your investments
The platforms that you use tend to do the rebalancing of your portfolios, which tend to be fluid. Generally speaking, when you want to take a lower level of risk, you will have more bonds (government or corporate) in your portfolio. Then, you’ll also have some equity funds — which are index funds based on shares of companies. More high-risk portfolios tend to be geared to having more equities.
It’s important to get a feel for how much risk you’re willing to take — the best advice is simply to start small and see how you feel when the market fluctuates. Remember, though, that it’s always best to not overreact and not obsess over your investment performance on a daily basis!
When you make your investment, then your money will usually be invested in a portfolio of funds — usually from 5 or maybe up to 20 different funds — the manager, or chief investment officer at the company, will guide the algorithm as well as choose the funds and portfolios.
Once you’re invested, you can definitely look at where your money has gone to — normally, these investment platforms are very user-friendly, and you can look through all the information of the funds you’re invested in and maybe do some extra research to find out more.
Because you’re with a robo-adviser, you can’t change what’s in your portfolio, but you can use it as a learning opportunity and a stepping stone toward moving to a more DIY platform.
Don’t forget that you’re not married to your platform — you can always switch it up if you’re no longer happy!
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