One of the most common personal finance related questions I get is “how do I start investing?”
When you think of investing, you may think of stock trading, equity research, and portfolio monitoring. It can be time consuming, especially when you have a full time job and/or studying in school.
The solution to this is robo advisors – my favourite personal finance innovation. Robo advisors are known to be the future of investing. Many millennials are making the switch over to this investment strategy, saving fees from mutual funds and/or financial advisors. This is a growing trend – by 2020, it’s expected that approximately $8.1 trillion will be managed by robo advisors, globally (Business Insider).
How Do Robo-Advisors Work?
Robo-advisors invest based on your personal financial circumstances. This is determined from a questionnaire filled out during the account opening process. Questionnaires typically ask personal finance related questions such as your investing risk tolerance, income, assets and liabilities.
The main purpose of a questionnaire is to assess which portfolio would be the best fit for you. This is typically determined by an algorithm. Many robo advisors would have around 3 portfolios for their investors (conservative, balanced, and equity). However, Justwealth has over 60 portfolios for their clients. In other words, they have more tailored solutions for a wide variety of personal finance circumstances.
This is basically my favourite feature; robo advisors autobalance, ensuring that the portfolio meets your risk tolerance and personal finance circumstances. For example, if you have a balanced portfolio, the robo-investor would aim to have an approximately even split between equities and bonds (fixed income).
Mutual funds usually have a management expense ratio north of 2.5%, whereas ETFs is typically around 0.50% (rough approximation). Mutual funds are pricier due to the fact that they’re actively managed. ETFs, on the other hand, are passively managed, saving on portfolio management related costs.
Costs for Canadian robo advisors vary – depending on how much you invest, and any applicable promotions. For example, Justwealth has a fixed cost of 0.5% for assets under $500,000, and Wealthbar’s pricing is dependent on the amount invested, which can be calculated here.
Robo-advisors are ideal for anyone – from non-savvy investors to savvy investors. It’s a great way to diversify your portfolio with a group of ETFs, and lowering your fees related to portfolio management.
Personally, the biggest advantage of robo-investing is the amount of time it saves. If you’re occupied during the day with school and/or work – robo investors take care of your money automatically. In other words, you don’t have to monitor your portfolio as closely to make sure it has the optimal mix of equity and fixed income.
I recommend looking into reputable robo investing companies, such as Justwealth, WealthBar, and Wealthsimple. Justwealth has a special offer, where you’ll receive a $50 credit when you open an account.
If you want to start investing (or if you’re looking into mutual fund alternatives), robo investing is the answer. It saves your time and money. However, ensure to have an automatic contribution set up to take the most advantage of it. As mentioned in the Millennial Savings Guide: automatic savings to an investment account is the key to financial success.
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Writer: Jelani Smith
Disclaimer: All investing can potentially be risky. Investing or borrowing can lead into financial losses. All content on Bay Street Blog are solely for educational purposes. All other information are obtained from credible and authoritative references. Bay Street Blog is not responsible for any financial losses from the information provided. When investing or borrowing, always consult with an industry professional.