There’s little room to debate the concept that learning how to invest your money can be overwhelming and complicated.
There are so many options available to investors, whether you want a short-term or a long-term option. You might be researching how to invest in penny stocks if you want the possibility of faster returns, or if you’re a more risk-averse investor you might want to learn the ins and outs of mutual funds.
Regardless of your investment interests, it does take time to learn the ropes, which is why an increasing number of people are looking to the options provided by robo-investing. Robo-investing, for all of its advantages, does have some disadvantages as well, which are covered below.
Depending on your perspective, automatic rebalancing can be one of the biggest pros or cons of robo-investing.
In terms of it being an advantage, automatic rebalancing keeps your portfolio optimized for your investment goals with no effort on your part. Your portfolio won’t become overweight in a particular area, and you’ll continue to have your investments diversified in the way you want them.
At the same time, when you have a portfolio that’s automatically rebalanced, that can mean you actually lose opportunities to invest more heavily in stocks that are performing well. You can find that your money is being taken out of top-performing sectors just as they’re going up.
The cost issue doesn’t apply to every investor. It applies to those investors who if they weren’t using robo-investing would otherwise by hiring a financial advisor. A financial advisor is a lot more expensive than using a robo-advisor tool.
At the same time, some investors, particularly if they’re novices or they tend to become anxious over uncertainty, feel the loss of personal touch with robo-investing is a con and something they’re willing to pay more for.
One of the biggest pros of using an automatic investment platform that applies to most investors is the tax advantage. Managing your tax liabilities can be difficult when you’re a self-directed investor and sometimes even when you’re working with a financial advisor.
With a robo-advisor, you have the peace of mind that comes with knowing you’re optimizing your tax liabilities and the moves made by these automated investment tools are specifically designed to follow the rules of the IRS, without you having to worry about it.
Robo-advising services and platforms are increasingly being marketed as personalized investment options where the investor can have all the work done for them based on their personal goals. While to an extent this is what happens, there’s still never going to be quite the same level of personalization that’s available when someone is making their own decisions or working with financial advisors. Also, robo-advising may not be for everyone, particularly if they have a unique tax or financial situation.
Ultimately, while robo-advising does offer excellent opportunities for some investors, it should be carefully weighed because it’s not optimal for everyone.