Whatever your investment goals, robo-advisors can provide affordable and easy-to-use tools to help you reach them. Compared to human-managed accounts, robo-advisors often have cheaper management fees and lower or no minimum account balances.
Best of all, once you set them up, you can usually leave them alone while they do the work of maximizing your investment potential. This is ideal for military members who may lack the time or access to manage their own portfolios.
What is a Robo-Advisor?
Robo-advisors are automated platforms that use algorithms to guide your investment choices or manage your portfolio on your behalf.
In most cases, these services ask you to provide input on your risk tolerance and financial goals to build a personalized investment portfolio. Your answers determine how the robo-advisor will allocate, diversify and balance your portfolio.
Depending on the type of investment account and the robo-advisor, investment options can include low-cost ETFs invested in stocks, commodities, bonds and even real estate.
A Word About ETFs
Like mutual funds, exchange-traded funds (ETFs) are a type of investment that contains multiple other securities, including stocks, bonds, commodities and more. You can trade ETFs like stocks, unlike most mutual funds.
According to the U.S. Securities and Exchange Commission, investing in ETFs can lower your overall financial risk by diversifying your investments across companies and sectors.
Why Choose a Robo Advisor?
Robo-advisors are rapidly becoming the platforms of choice for hands-off, low-cost investing. Traditional financial firms like Vanguard and E-Trade are developing their own automated investment platforms alongside their traditionally-managed or actively-traded account options.
Here are some reasons why many people have shifted their investments to robo-advisors.
Cerulli Associates estimates traditional investment advisors cost an average of 1% annually of assets under management (AUM). Your AUM is your account balance. At 1%, you’d pay around $1,000 in management fees for a $100,000 investment..
While 1% might not seem like a lot to pay for financial advising, assuming an average return of 4%, you could end up paying $28,000 in fees over 20 years, according to the Securities and Exchange Commission (SEC). Add an additional $12,000 if you count the money you may have missed out on by not investing those fees.
Robo-advisors usually charge less than half of this fee while providing similar results.
Whether you choose to go with a robo-advisor or a traditional advisor, pick the one that yields the highest returns with the lowest management fees. If a traditional advisor costs .075% more than a robo-advisor, your returns should be at least .075% higher to justify their higher fees.
Ease of Use
Most investors don’t want to “go it alone” when it comes to investing. Still, in-person financial advising can be hard to find if you’re stationed in another country or don’t have enough invested to make your AUM percentage worth a financial advisor’s time.
Using a robo-advisor service can be as simple as connecting to a mobile app. With just a few questions, robo-advisors can identify your investment goals and set up your portfolio’s target allocations, regardless of your current time zone or net worth.
Tip: Track your TSP and other investments with Personal Capital’s free financial dashboard.
Automated Investment Rebalancing
Over time, you need to review and adjust your investment strategies to ensure your portfolio remains well-balanced. Robo-advisors use your risk tolerance and other input to automate your rebalances. These usually occur at least annually, though some may rebalance twice a year or even quarterly.
Enabled by algorithms, robo-advisors can monitor your portfolio and rebalancing as needed to keep you on track to reach your investment goals. But, a good robo-advisor will only rebalance when the benefits outweigh the costs.
This is important because as the market changes, the percentage of each asset’s value in your portfolio changes too. Rebalancing a few times a year can help you get back to the optimal target allocation for your risk level.
By Teresa Tennyson and Jamie Melchert with themilitarywallet.com