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More than half (51%) of new retail investment accounts are opened through robo-advisory platforms, which have evolved beyond being simple automated investing apps. Robo-advisors typically feature automatic rebalancing and recurring investments and are a less costly way for consumers to manage their portfolios. These AI-powered financial services also monitor portfolios, perform real-time market analysis, and offer more personalized investment strategies than their earlier versions.
However, with the technological changes in robo-advising come two crucial questions: what should you actually be watching in your automated portfolio, and what should you ignore?
Key Takeaways
- Robo-advisors handle the heavy lifting of portfolio management, typically at a fraction of traditional advisor fees.
- Despite their automated features, you’ll want to keep an eye on how your robo-advisor divides your money among stocks, bonds, and other investments to ensure your portfolio fits your goals.
- You’ll want to ensure your robo-advisor regularly rebalances your portfolio to maintain your desired level of risk.
- You’ll also need to check how your portfolio is performing compared with market benchmarks.
How Robo-Advisors Work
When you start with a robo-advisor, you’ll be asked to answer a series of questions about your finances, investment goals, and how comfortable you are with risk. The questionnaire should cover all the basics: How much do you want to invest? When will you need the money? Are you saving for retirement in 30 years or a house down payment in five? Based on your answers, the robo-advisor should create a personalized investment portfolio and manage it on your behalf through a website or mobile app.
While some robo-advisors involve almost no human interaction at all, you can opt for a hybrid robo-advisor. This type of robo-advisor automates your investing, plus gives you access to real financial advisors when you have questions or want to discuss major life changes. These services typically cost a bit more, but many investors find the combination of automation and a human touch worth the bit extra.
Tip
According to the Financial Industry Regulatory Authority, robo-advisors typically handle at least six key functions: understanding your profile, allocating your assets, selecting your portfolio, executing trades, rebalancing investments, and harvesting tax losses to potentially save you money.
Key Elements to Monitor in Your Robo-Portfolio
The whole point of a robo-advisor is to sit back and let technology handle your investments. However, this doesn’t mean you should never check in. Here are the key things worth monitoring:
- How your portfolio is doing: You’ll want to make sure your portfolio is meeting your expectations. Is your retirement account growing at a pace that will get you to your goal? Are you on track for that house down payment? If your returns consistently fall short of what you expected, it may be time to reassess your strategy or consider switching to a different platform.
- Asset allocation: As with a regular financial advisor, every few months, but no less than once a year, it’s a good idea to look at how your money is divided among stocks, bonds, and other investments. When you’re younger, it’s generally better to have more money invested in higher-risk assets that can yield better returns, since you’ll have more time to make up for bumps in the road. However, as you approach retirement, you’ll need to consider more conservative investments to protect what you’ve built. If your robo-advisor’s allocation doesn’t feel right for your age or goals, don’t hesitate to adjust your settings or contact customer service.
- Rebalancing: Your robo-advisor should periodically adjust your investments to keep your portfolio on track. Most do this quarterly or when your allocation drifts too far from your target. If you notice that your robo-advisor hasn’t rebalanced in over a year, or if it’s trading too much (which could result in unnecessary fees for you), reach out to understand what’s happening.
What To Ignore in Your Robo-Portfolio
Just as important as knowing what to watch is understanding what you can safely ignore:
- Short-term market shifts: World events, politics, wars, and other factors can all have daily or short-term effects on the stock market. Should your portfolio drop over days or even weeks and months, you should resist the urge to panic since history shows that over time, the market has bounced back. Your robo-advisor should be designed to handle any market volatility for you, automatically adjusting as needed, which can help keep you from making emotional decisions in the heat of the moment.
- Your robo-advisor’s “boring” investment choices: Don’t worry if your robo-advisor isn’t buying the stocks trending on social media or in the financial news. Instead, your robo-advisor will typically invest for the long term based on your risk tolerance and investment goals, which often involves parking your money in broad market exchange-traded funds, such as those that track the S&P 500 index.
Tools You’ll Want From Your Robo-Advisor
Robo-advisors typically offer built-in tools to help you track your goals, whether it’s saving for retirement or your first home. When choosing a robo-advisor, look for tools that help you with setting goals, tracking your progress, and rebalancing your portfolio. A good platform should also help you choose among different portfolio styles, such as socially responsible investing, tax-efficient strategies, or help you with specific goals like retirement or college savings.
Your robo-advisor’s platform should be intuitive enough that you can quickly check your balance, see how your investments are performing, and understand where your money is going without needing a degree in finance.
Who Should Use a Robo-Advisor?
Robo-advisors may be best suited for first-time or newer investors who need a low-cost option for managing their portfolio. They are also a good option for those comfortable with online platforms and don’t need frequent handholding from a human advisor.
What Happens if My Robo-Advisor Doesn’t Rebalance My Portfolio Regularly?
Skipping regular rebalancing can throw off your investment strategy. As you get older, you might end up invested in stocks with too much risk if your portfolio isn’t shifted over time. When you’re younger, you could miss out on growth if your investments become too conservative.
How Do Robo-Advisors Affect My Taxes?
Many robo-advisors use strategies like tax-loss harvesting to help reduce what you have to pay the IRS. This means selling investments that have lost value to offset gains from your winners. The IRS lets you deduct up to $3,000 in investment losses each year, which can save you real money.
The Bottom Line
Robo-advisors offer a lower-cost, automated way to manage your investments, while still providing access to professional tools such as asset allocation, rebalancing, and tax loss harvesting. When using a robo advisor, it’s important to check your asset allocation, portfolio performance, and rebalancing activities, while you can safely ignore any short-term market shifts.
Check in periodically to make sure you’re on track, but resist the urge to tinker with your investments every time the market has a bad day.
