Robo advisors are an easy way for you to engage in automated investing without having to make an appointment to see a person at your bank. Not all robo…
Historically, investing was the realm of somewhat well-educated people who could examine trends and charts and predict with some accuracy the fluctuations in the market, and capitalize on them. Robo advisors are pieces of software that do the same thing, except instead of instinct, they use a complex mathematical algorithm to predict gains and losses. Depending on your appetite for risk and reward, a robo advisor may be a good solution. If you are more of a hands-on investor then an automated trading platform may not appeal to you, but there are some benefits to it.
Robo advisors use at least two trading algorithms or theories to process their decisions, the Efficient Market Hypothesis and the Modern Portfolio Theory (MPT). In layman’s terms, MPT proposes that an investment portfolio can be organized in such a way that the rate of return is maximized against the risk appetite of the investor. The Efficient Market Hypothesis states that, despite the large swings in the stock market, stocks will always return to trading at their fair market value. The data sets in support of these algorithms are huge and would take human investors thousands of hours to process, whereas a robo advisor can process it in real time.
Typically, the fees associated with a robo advisor are less than a human advisor. Because it is software-based, you will generally see 1 to 2 percent savings in comparison to a human advisor.
Robo advisors are complex pieces of software that run 24/7 to examine all of the data sets from the previous day and be ready the exact second the market opens. There are no late mornings or bad days for the software. Robo advisors also do not factor instinct into the equation when making investment decisions — the programming that is created when the investor initially answers questions about their desired rate of return and risk appetite will always dictate the investment path.
An IRA is an individual retirement account, and is an investing tool focused on accumulating savings for retirement. A robo advisor is an automated software that will invest on your behalf, based on your appetite risk and desired rate of return. Since you can invest in an IRA directly, you could, in theory, take the gains you earn from the robo advisor and top up your IRA.
Robo advisors use a complex algorithm and multiple investment theories such as the Efficient Market Hypothesis and Modern Portfolio theories. That, combined with big data analytics using data science methods, allows the robo advisor to choose the investments that best match your desired rate of return in conjunction with your risk appetite. In some cases, there can be a human touch to the investments for governance sake, especially in the case of ethical investing, but for the most part it is a hands-off approach.