Advancing technologies and new regulations enable consumers to manage personal finance and investments more effectively.
Auto investing is in line with the trends younger generations are embracing. It streamlines the process of saving, risk management, and then funding your money for the long-term goals in life.
We’ll get the meat of what exactly auto investing is, its variations, how they work, the pros and cons, and how to select a platform or an app for your particular situation.
The takeaway: It’s mostly a good idea.
What is auto investing?
Auto Investing is the act of using digital platforms to put your investments onto autopilot.
Do you have a certain percentage of your paycheck go towards your retirement fund every month? You have already automated some of your investments if the answer is yes.
You can use this same method and take advantage of digital platforms to set aside money each month that you can pour back into your investment portfolio.
How does auto investing work?
Auto Investing Platforms use complex algorithms often known as Robo-advisors (though they can be separate entities) to deliver their services.
Investors get asked several questions so that the platform can understand their income goals and risk tolerance.
Because Robo-advisors work within predetermined parameters, they’ll only make high-risk investments if you’ve selected that preference.
Robo-advisors will also handle diversification and rebalancing, which minimises the volatility of your portfolio over time.
What are the benefits of Auto Investing?
Several benefits make Auto Investing attractive, especially to new investors looking to build a diverse portfolio.
For more well-versed investors, however, you may still need convincing, and if that’s you, here’s why you may want to put your investments on auto-pilot:
It removes the human element
Robo-advisors use algorithms powered by real-time data to ensure that any decisions regarding your portfolio are made based on rational factors that account for market changes rather than human emotions and bias.
This level of speed and reaction can increase your level of protection in the face of volatile markets.
Leveraging Robo-advisors also means there is less reason to make bold decisions fuelled by emotions, resulting in detrimental losses.
Ability to set up automatic contributions
Automating investments is an intrinsic part of modern-day investing as it ensures that your portfolio is constantly growing through automatic contributions.
How does this work? When you first sign-up to an Auto Investing Platform, you’ll be asked a set of questions, including the monthly amount you’d like to set aside for investing and your risk tolerance.
The platform will then continue to make monthly contributions on your behalf until you decide to stop investing.
You can also adjust the amount you invest depending on your financial circumstances, meaning you are in control of how much you invest.
Better ROI and protection
Robo-advisors actively work to maximise return on investments by frequently managing the diversification of your portfolio. In addition, spreading your investments helps insulate you against individual losses and inflation.
Compound interest also contributes to better ROI for Automated Investing as the more investments you have, the more interest you’ll build over time. This makes reaching big income goals like saving more attainable.
For instance, if you wanted to save for a 10% deposit of a house, the current average house price in the Uk is £270,000, meaning you’d like to save £27000 for a 10% deposit. With Auto Investing, you could earn a 10% ROI per annum.
Say you started with an initial investment of £10,000 and were able to save an additional £100 per month, this would mean after six years, you would have £27,900 having earned £10,700 worth of interest on your investment.
This is opposed to only £430 interest earned, had the money been kept in a standard bank account paying the bank of England base rate of 0.5% interest.
Essentially, over six years, you’ve lost over £10,000 from putting your money in a savings account instead of investing it wisely which could lead you to your income goal in just seven years just from compound interest.
Lowers the barrier to entry
Auto Investing lowers the barrier to entry because anyone can start making investments no matter their knowledge.
Additionally, using an Auto Invest Platform to manage your portfolio results in minimum monthly costs than going to a wealth management firm that would charge an hourly rate + for the privilege.
Because of smaller fees investing has now been made available to a broader range of people who want to build their wealth.
Finally, there’s usually no minimum amount you have to pay towards your monthly investment, unlike a hedge fund that would expect a client to pay an upfront deposit of £10,000.
Are Robo-advisors safe?
The short answer is yes, independent Robo-advisors and safe to use. This is thanks to MiFID II (an extension of MiFID), which ensures all investment services are strictly regulated to provide consumers with quality services and robust security.
MiFID II has a much larger scope than MiDIF and tackles the ever-changing investment landscape in light of emerging Robo-advisors. However, MiFID II is mainly concerned with delivering greater transparency in investment services about cost and risk and ensuring service providers have the skills needed to do the job.
All this means that Auto Investing platforms, including independent Robo-Advisors, are required to communicate risk levels to clients and the safety of their platforms to comply with EU law.
So if you’ve ever asked yourself if you can trust a robot with your bank details, the answer is yes, you can, and the law makes sure that your details are protected every day.
How to choose the right Auto Investing Platform for you?
The Auto Investing Platform you choose will largely depend on your financial goals as well as the level of knowledge you have. For instance, some platforms are more sophisticated and have a higher barrier to entry, and others are more beginner-friendly.
You’ll also want to consider the platform’s values and whether they match your own. Take a look at a great overview of the top investment apps in the UK.
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