Everything You Need to Know About Automated Investing

Key Takeaways

• Investors considering the technology-driven investment method must first understand their needs and how automatic management can help them reach short- and long-term goals.

• Generally, robo-advisor platforms offer automated investment advice as well as portfolio management, commonly with an emphasis on passive investing. 

• Automated investing may encompass broader strategies and technologies such as more complex solutions and active trading algorithms.

For many investors, particularly those who are comfortable with technology, the combination of convenience and cost-effectiveness is hard to resist. And that is what automated investing offers, and more, although the approach does not work for everyone. 

To help investors decide whether to participate, here is everything there is to know about automated investing.

What is Automated Investing?

This is a sweeping term for having one’s investments managed through technology that employs mathematical models and algorithms.

Basically, algorithms make passive investment decisions so that investors do not have to. With automated investing, a high degree of market knowledge is not required.

How Does Automated Investing Work?

In essence, automated investing leverages algorithms and technology to manage investments for clients, often using what is called the Modern Portfolio Theory, which basically aims to mitigate market risks while maximizing investor returns.

 The automated approach generally entails the following:

• Onboarding. The prospective client fills out an online questionnaire to set their investment goals, time horizon, and risk tolerance, as well as their overall financial state.
• Strategy formulation. A “robo-advisor” or other automated financial planner uses the client’s profile to formulate a customized investment strategy.
• Allocation of funds. Using its investment platform, the robo-advisor allocates the investor’s funds across real estate investment trusts — the alternative investment platform Yieldstreet offers a popular REIT — as well as stocks, bonds, or other asset classes. The platform makes certain that investments are diversified to mitigate portfolio risk.
• Trades are executed. To maintain the favored asset allocation, funds are automatically bought and sold.
• Rebalancing. If market movements cause holdings to move away from the target allocation, the platform will automatically rebalance the portfolio.
• Monitoring. The investor’s portfolio performance, along with market conditions, will be continuously monitored.
• IRS optimization. Some platforms offer what is called tax harvesting, which minimizes the client’s capital gains taxes.
• Regulations compliance. To ensure that investments are made in the client’s best interest, platforms must comply with federal regulatory requirements.

Note that these automated investment platforms may be accessed around the clock. At any time of the day or night, investors can see how their portfolio is performing, and even input preference changes.

Types of Automated Investing 

Investors considering entering the automated investing space certainly have a number of types from which to choose, with services allowing investors to select a strategy that aligns with their goals, style, value, and risk tolerance.

Automated investing types include:

• Robo-advisors for institutional investors. Institutional clients such as pension funds use these platforms.
• Robo-advisors for tax optimization. The focus for these automated financial planners is on strategies to reduce tax liability such as tax-loss harvesting.
• Robo-advisors for active trading. Active traders use this type of platform for swing trading and day trading.
• Micro-investing platforms. Small amounts of money are invested here, frequently by rounding up purchase totals.
• Goal-based robo-advisors. This strategy personalizes investment approaches based on the client’s investment objectives, such as retirement or purchasing a home.
• Robo-advisors with socially responsible investing. Investors who use these types of platforms favor investments that are in line with environmental, social, and governance values.
• Hybrid robo-advisors. This platform combines automated algorithms with, for personalized guidance, human financial advisors.
• Pure robo-advisors. Fully automated, these platforms use algorithms to manage investments — with no human input.

Automated Investing vs Robo-Advisors

Many people conflate automated Investing and robo-advisors, and it is true that the terms may generally be used interchangeably. Still, there are some nuances and characteristics that should be understood.

Generally, robo-advisor platforms offer automated investment advice as well as portfolio management, commonly with an emphasis on passive investing. On the other hand, automated investing may encompass broader strategies and technologies such as more complex solutions and active trading algorithms.

Similarities 

In terms of how the two are alike, both robo-advisors and automated investing depend on technology and algorithms for investment management. Thanks to them, investment management is available to anyone — not just the wealthy — and with what usually are low minimum requirements. In addition, they both have lower fees than traditional financial advisors.

Moreover, robo-advisors as well as automated investing use an approach that is based on investment objectives, risk tolerance, and other factors. Also, to permit easy access and monitoring, both are commonly accessible digitally.

Differences

While all robo-advisors may be classified as automated investing, not all automated investing means robo-advisor. In other words, automated investing is a more general term that includes any type of investment management that employs technology to automate various processes — yes, robo-advisors, but also AI-powered portfolio management and algorithmic trading.

So, robo-advisors are a certain type of automated investing. The top ones focus on customized investment advice, and manage portfolios using algorithms. Then there is human interaction. Depending on the platform and service level, automated investing may offer this option. There are hybrid robo-advisors who use a combination of algorithms and human advisors.

Regarding strategy, automated investing possesses the spectrum of secondary index investing to active trading based on algorithms. By contrast, robo-advisors usually emphasize passive investment strategies to establish diversified holdings.

Pros and Cons of Robo-Advisors

As with most everything in the investment space, there are potential benefits and drawbacks to using robo-advisors.

On the positive side, investment models are robust, and robo-advisors are usually less expensive than working with human, traditional financial advisors. Also, accounts are typically easy to start and have low account minimums, if at all. They also include ongoing monitoring and management.

A key advantage of robo-advisors is that automated investing can obviate the client’s need to do a great deal of research or make tough decisions regarding their portfolio.

However, robo-advisers may be more expensive than managing one’s investments independently. There is also limited personalization, and a chance that the robo-advisor will take a too-narrow view of investments or a financial situation. Some investors also miss the human interaction.

The Advantages and Disadvantages of Automated Investing 

The potential advantages of going the automated route include:

— Cost effectiveness

— Efficiency

— Accessibility 

— Consistency

— Customization

— Diversification 

— Availability 

The potential cons are:

— Limited complexity

— Lack of human involvement 

— Technology risks

— Oversimplification 

— Lack of control

— Market sensitivity

— Potential conflicts of interest

How Do I Get Started?

Getting started is straightforward and relatively simple. Before signing on with a platform, however, the investor must identify their goals and risk tolerance.

Once that is done, the investor may select an investing platform by comparing fees, investment features and options, and minimum investment requirements. For example, Betterment charges nothing to open a brokerage account, while rival Wealthfront has a $500 minimum. The amount generally depends upon the platform and service type.

After that, the investor can open an account and fill out a risk evaluation questionnaire, then choose a recommended portfolio. The only step that remains is funding the account, typically through a linked bank account.

Other requirements also vary, but generally, clients must be at least 18, a citizen or resident of the country where the platform is based, and have a Social Security number or taxpayer identification number.

Other Ways to Get Help with Investing 

As has been discussed, many investors, particularly novices, are attracted to automated investing because teaching oneself how to invest can be very time consuming and takes a great deal of interest and effort. Learning how the financial markets operate is quite an undertaking. Automated investing takes care of it all so that investors need not.

Investors can experience a similar confidence with the offerings of leading alternative platform Yieldstreet, on which nearly $4 billion has been invested to date. After all, the private market has, over the past 15 years, outperformed stocks in almost every downturn.

While no investment is risk free, Yieldstreet does have a rigorous system for putting up the best possible opportunities. Its curated investment offerings are first subject to a robust vetting process that entails extensive screening. With this structured, exacting, and holistic approach to evaluations, everything from appraisals and insurance policies to market trends are factored in before the opportunity even makes the platform. 

Such offerings, which include art, real estate, and more, serve an additional, essential purpose: diversification. Crafting a portfolio made up of varying asset types with different degrees of risk can lessen overall portfolio risk, guard against economic instability, and potentially improve returns.

Alternative Investments and Portfolio Diversification 

Alternative investments can be a good way to help accomplish this. Traditional portfolio asset allocation envisages a 60% public stock and 40% fixed income allocation. However, a more balanced 60/20/20 or 50/30/20 split, incorporating alternative assets, may make a portfolio less sensitive to public market short-term swings.  

Real estate, private equity, venture capital, digital assets, precious metals and collectibles are among the asset classes deemed “alternative investments.” Broadly speaking, such investments tend to be less connected to public equity, and thus offer potential for diversification. Of course, like traditional investments, it is important to remember that alternatives also entail a degree of risk. 

In some cases, this risk can be greater than that of traditional investments.

This is why these asset classes were traditionally accessible only to an exclusive base of wealthy individuals and institutional investors buying in at very high minimums — often between $500,000 and $1 million.  These people were considered to be more capable of weathering losses of that magnitude, should the investments underperform.

However, Yieldstreet has opened a number of carefully curated alternative investment strategies to all investors. While the risk is still there, the company offers help in capitalizing on areas such as real estate, legal finance, art finance and structured notes — as well as a wide range of other unique alternative investments. 

Moreover, investors can get started with a relatively small amount of capital. Yieldstreet has opportunities across a broad range of asset classes, offering a variety of yields and durations, with minimum investments as low as $10,000.

Learn more about the ways Yieldstreet can help diversify and grow portfolios.

Summary

Saving time and money are big inducements when it comes to automated investing. Investors considering the technology-driven investment method, which does have its drawbacks, ust first understand their needs and how automatic management can help them reach short- and long-term goals.