What Is Automated Investing?

Automated investing is the process of using technology to manage your investments with minimal input from yourself. Platforms providing automated investing — also called robo-advisors — use algorithms to construct, track, and rebalance portfolios guided by user-specified financial objectives and risk appetite.

Unlike traditional investing, which often involves some degree of manual decision-making or working with an investment adviser, this is a hands-off approach. The advantage of automated investing is that it utilizes predefined strategies to handle your investment management automatically.

How Does Automation in Investing Work?

Onboarding and Assessment

Signing up for an automated investing platform requires you to answer a questionnaire which assesses your:

  • Wealth goals (e.g., retirement, wealth growth, or education funding).
  • Risk tolerance (from conservative to aggressive).
  • Investment horizon (long-term vs short-term goals).

It uses such data to prepare you a custom-made investment plan.

Portfolio Construction

The platform builds a diversified portfolio of assets according to your profile. Most portfolios include:

  • Stocks for long-term growth.
  • Bonds to reduce risk.
  • Index and diversified multi-asset ETFs (Exchange-Traded Funds).

Continuous Monitoring

Automated systems help monitor your portfolio to make sure it matches your financial needs. If the market turns, the platform automatically changes the allocation to keep you at the risk level you want.

Rebalancing

As market conditions change, the allocation of assets may move away from original targets. Automated platforms periodically rebalance your investment portfolio to keep it aligned with your investment strategy.

Tax Optimization

A number have tax-loss harvesting, a strategy used to reduce taxable gains through the selling of poorly performing assets.

Advantages of Automated Investing

  • Cost Efficiency: Automated investing platforms tend to charge lower fees than human financial advisors. Management fees usually run from 0.25% to 0.50% of its assets under management, making it a cost-effective choice for many investors.
  • Accessibility: Automated investing doesn’t require prior financial knowledge or expertise. Platforms, by their very nature, are easy to use, allowing anyone to click from the menu and start investing.
  • Low Minimum Requirements: With low (or even no minimum investment requirements), many platforms allow for those with little capital to get in the game.
  • Time-Saving: These platforms free investors most of the time and energy by automating essential processes such as asset allocation, rebalancing, and tax optimization.
  • Emotion-Free Investing: As they are not prone to emotions such as fear or greed, it offers a more consistent and rational investment approach.

Disadvantages of Automated Investing

Automated investing has many benefits, but you need to pay attention to its limitations:

  • Limited Personalization: Automated platforms deploy preset strategies that might be a poor fit for your complex financial situation or your individual circumstances.
  • Lack of Human Interaction: The lack of human advisors can be a disadvantage for investors who are used to personalized advice or have complex financial goals.
  • Algorithmic Dependence: Algorithms do not always take into consideration once-in-a-lifetime market events and the unique factors of individual situations.
  • Narrow Scope: Most platforms are focused on portfolio management only and do not offer wider financial planning services like estate planning or debt management.

Automated Investing vs Traditional Investing

Aspect Automated Investing Traditional Investing
Cost Low (0.25%-0.50% of AUM) High (1%-2% of AUM)
Human Interaction No (Completely algorithm-driven) Yes (Human personalized advice)
Customization Standard financial goals Entirely customizable
Scope of Services Portfolio management only Full financial planning
Best For Beginner, price-sensitive investors High-net-worth individuals, complex strategies

How Different Types of Automated Investing Platforms Work

Platform Type Key Features Best For
Robo-Advisors Completely automated portfolios, tax-advantaged investing Novice and experienced investors
Hybrid Platforms Blends robo-advice with human consultancy Investors wanting a balance of automation and human interaction
Self-Directed Platforms Provides automation tools for DIY investors Skilled investors seeking control

Top Automated Investment Services

  • Betterment: Retirement planning and tax efficiency. Charges a flat 0.25% fee for basic services.
  • Wealthfront: Provides advanced financial planning tools and tax-loss harvesting. Requires a minimum investment of $500.
  • Fidelity Go: Supported by Fidelity’s knowledge and trusted brand. No minimum for entry-level investors.
  • Ellevest: Focused on women investors and impact investing. Offers customized portfolios aligned with gender goals.

Things to Think About When Choosing an Automated Investing Platform

When choosing an automated investing platform, it’s important to assess your financial needs and compare the following features:

  • Fees and Costs: Review competitive management fees and watch for extra expenses like ETF expense ratios.
  • Features: Evaluate whether it offers tax-loss harvesting, retirement planning, or impact investing.
  • Minimum Investment: Select a platform based on the availability of your initial capital.
  • User Experience: It should be user-friendly, engaging, and available across multiple devices.
  • Customer Support: Reliable support allows you to solve problems or inquiries quickly.

Advantages and Disadvantages Table

Benefits Limitations
Reduced fees Only for simple financial needs
Money management tools Lacks human interaction
Automated tax strategies Dependent on algorithms
Beginner-friendly Limited customization

FAQ: Frequently Asked Questions

  • How much does automated investing cost at a minimum? Most platforms have low- or no-minimum investment requirements. Betterment has no minimum, for example, while Wealthfront has a $500 minimum.
  • Is automated investing fit for amateurs? Yes, it is perfect for beginners because automated investing is simple, inexpensive, and passive.
  • Can I create my own portfolio using an automated platform? Customization is generally confined to choosing a risk tolerance and financial goals. For very tailored strategies, hybrid or traditional advisors may be superior.
  • Does automated investing promise returns? No, returns vary based on market performance. Automated investing can optimize portfolios; however, all investments carry risk.
  • How much will I pay and what is the fee structure? Automated platforms charge far less, generally 0.25%-0.50% of assets under management, compared to traditional advisors who charge 1%-2%.
  • Can I take money out of an automated investing account? Yes, most platforms will let you withdraw funds at any time. However, selling your investments may incur taxes or fees.

Wrap Up: Is Automated Investing a Fit for You?

For beginners, busy professionals, and cost-conscious investors, automated investing is an efficient and affordable solution. These platforms use advanced algorithms and technology to offer easy financial planning and portfolio management.

However, for investors with more complex needs or who want a more personalized touch, traditional or hybrid solutions may prove more convenient. Ultimately, the choice to embrace automated investing depends on your financial goals, risk tolerance, and preference for technology-driven solutions.