Artificial Intelligence is slowly taking over many aspects of our lives, from manufacturing and shopping to sports and entertainment. Nowadays, you can also automate your investments through a robot advisor.
Your robot investment fund does all the hard work for you. All you do is sit back and watch your portfolio grow. Millions of people trust these programs: they manage more than $200 billion worth of investments according to US News.
But how effective are they? What are the benefits and risks of leaving your investment portfolio to AI?
An Overview of Robo Advisors
Robo advisors are software programs that use AI algorithms to manage people’s investments. Although many Robo investment platforms are full automated, some of them also support human intervention.
Proponents of Robo advisors say these tools eliminate the human emotion factor that often cost many traders their profits. Because software is emotionless, it can make fact-based decisions to maximize your profits and limit your losses.
What Robo Advisors Can and Can’t Do
Before we talk about the effectiveness of Robo advisors, let’s talk about how they work. Robo investment programs invest based on the information fed to them. If programmed to buy when the price rises by 2%, that’s what they do.
If programed to sell your investment if it goes down by 5%, they stick to the rules. They can’t go off track. That means a Robo advisor will be right and wrong based on the information fed to them. Additionally, they can handle these tasks:
- Dollar cost-averaging
- Portfolio balancing
- Harvesting tax losses
- Finding investments for you
- Balancing Risk with Reward
That said, you can’t interact with a Robo advisor in the same way you can connect with a human advisor. It can’t tell you whether to change or not to change your portfolio. It’s up to you.
Best Robo Advisors
If you’re convinced a Robo Advisor is what you need to make money in the stocks market, there are plenty of options. Robo investment platforms vary in how they work, their fees, and limits, though.
If you want to maximize your profits, ensure you pick the right platform for you. Let’s say you want a program that invests in ETFs and not individual stocks; choose a platform like Nutmeg or MoneyFarm, both of which specialize in ETFs.
Before you make a decision, compare multiple platforms to learn how their investment programs work. MoneyFarm, for example, has seven portfolios. Each portfolio differs in how it allocates your money: developed markets, upcoming industries, corporate bonds, to name some
That being said, below are the top five most popular Robo investment platforms in the UK and the US:
- Vanguard Digital Advisor
- Scalable Capital
- Wealth front
Benefits of Robo Advisors
Robo Advisors have been around for more than a decade. Importantly, some of them have incredible results. Nutmeg, for example, has returned 43.7% since 2013 on its fully-managed program with a 5/10 risk rating. On the other hand, one of Money Farm’s portfolios has a return of 50.12% since 2016.
If you need more convincing that Robo Advisors work, take a look at these benefits of the programs.
- Automated Investing
Let’s start with the obvious. Robo advisors are effective in investing on your behalf. The programs give you a questionnaire with questions to assess your goals, risk tolerance and appetite for profit.
After that, the program takes over the investment process. If it’s programmed to invest through ETFs, it allocates your money to different ETFs. Then it monitors your portfolio, to buy and sell at the right time in a bid to make you profits.
- Financial Planning
If you’re unsure of how to invest, a Robo investment program can help you customize your portfolio based on the answers you give in your questionnaire. They are not as persuasive as human advisors. And they certainly lack a human touch. But they can help you make a financial investment plan.
- Low Fees
Generally speaking, Robo Advisors are cheaper than human investment planners. They don’t even charge you a minimum investment amount. You can start with a small amount you can afford to lose.
When it comes to management fees, the best programs charge you from 0.25% to 0.75% per year. The fee could be lowered if you’re planning to invest a huge amount, usually $100,000 or more.
Unlike traditional brokers, Robo Advisors don’t charge day-to-day trading fees. They don’t ask for commission fees either. And as a result, they can help you save a significant amount of cash that would otherwise go to fees.
- Free of Human Emotions
Emotion is a big reason why many people lose in trading. Let’s say you win a trade. So, you take on margin to increase your position. Sadly, the market goes against you and you lose. Robo Advisors are free of human emotions.
They don’t increase or reduce positions based on how they perform. They are immune to stress, excitement and other emotions some people rely on to make investment decisions. And due to that, they have a significant advantage over their human counterparts.
- There’s Variety
Contrary to popular belief, Robo Advisors don’t look and work the same. There’s a variety of them, which means you can choose a program design to work in alignment with your principles and goals.
If you want to invest in entertainment stocks, you can find a program that targets the industry. If you’re after fees, there’s a Robo advisor for you.
Robo Advisors aren’t fully personalized. You can’t have a face-to-face meeting with a software program. But here’s what a Robo advisor can do for you. It can invest on your behalf after learning about your goals.
The best Robo advisors have a history of turning profits consistently. But you have to be careful to pick the best programs. Otherwise, a terribly programmed piece of software can’t help you much.
As always, you can start small to learn first-hand about the effectiveness of these programs. If you like them, you can increase your portfolio.