How Robo-Advisors Guide Your Investing

Here’s everything you need to know

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In 10 seconds

A robo-advisor is a digital investment platform. Using algorithms, it automatically manages your investments according to your goals.

In 1 minute

Robo-advisors like Betterment use formulas to make smart investment decisions, lowering your cost and seeking to reduce human error in comparison to traditional financial advisors. This approach can give you some unique advantages.

Here are the five principles that drive robo-advisors’ approach to investing.

  1. Personalization. You’re the most important part of the equation. We adjust our algorithms to fit your goals and circumstances.
  2. Automation and discipline. Avoid some common investor mistakes by automating your deposits and resisting the urge to meddle with your portfolio. Robo-advisors aim to make this easy, with the hope that you can reach your goals sooner and keep more in your pocket.
  3. Diversification. Robo-advisors set up your portfolio for long-term success by investing in a wide range of assets. Diversification prevents you from being overly exposed to concentrated risks.
  4. Lower fees and costs. Algorithms don’t have salaries. It takes a lot less overhead to automate portfolio management. 
  5. Manage taxes. Taxes are often unavoidable. But with savvy investment moves, you may be able to offset them. Robo-advisors like Betterment can do this automatically if you choose, with features like Tax Loss Harvesting. 

If you have more time, we can unpack these principles in more detail.

In 5 minutes

In this article, we’ll:

  • Explain what robo-advisors are
  • Walk you through our five principles of investing

What are robo-advisors?

A robo-advisor is basically an automated financial advisor. Just like a human financial advisor, a robo-advisor gives recommendations based on your personal financial goals and circumstances. But instead of having a human manage your investment portfolio, a robo-advisor uses algorithms designed to find the optimal investment approach and maximize your returns.

It’s technology that helps you manage your money.

You can have as much or as little responsibility as you like. The robo-advisor gives you the data-driven insights you need to make wise choices or fully automate your investments. The biggest difference from a human financial advisor? A robo-advisor can cost you far less. 

Bottom line: Robo-advisors are able to give you similar performance to a financial advisor, but without the steep fees. So you can keep more of what your investments earn.

So what guides a robo-advisor’s recommendations? There are five key principles. 

1. Personalization

We want you to reach your financial goals. So, we start by learning about you. What do you want to achieve? How soon do you want to achieve it? The right investment depends on how much you need to earn and how much time you have to earn it. 

Not sure how much you need to reach your goal? Or how much you can even invest? We can help with that, too. We explore how things like your income, where you live, and your tax bracket affect what your goal looks like and how fast you can reach it.

The result is clear, achievable goals that fit your life and help you get the most from your accounts.

2. Automation and discipline

With automatic deposits and decisions based on algorithms, it’s easy to make steady progress toward your goals. It’s also easier to avoid common investor mistakes. Your portfolio will likely experience short-term losses here and there. It’s part of investing. And your reactions to these losses can have a huge impact on your long-term success. You can’t let emotions get in the way of your goals.

By automating your portfolio and staying disciplined about investing, you’re better equipped to ride out the short-term losses and enjoy long-term gains.

3. Diversification

We’re not here to help you pick the perfect stock. Investing in a single financial asset leaves you vulnerable to that asset’s risks. With a single stock, you could lose everything if a company goes bankrupt, performs poorly, or gets some bad press. 

Instead, we help you build a well-diversified portfolio. Diversification spreads your investments across assets, asset classes, and even markets, lowering your overall risk. We automatically diversify your portfolio based on your goals and desires. 

Through socially responsible investing (SRI), you can even diversify your portfolio according to your values. 

Want to invest in environmentally-conscious companies? Done. How about businesses that demonstrate a commitment to social values? Check. Want to have the broadest positive impact you can? Easy. We have three SRI portfolios to choose from. Note that higher bond allocations in your SRI portfolio decrease the percentage attributable to socially responsible ETFs.

However you diversify, this strategy helps you make steady progress toward your goal. 

4. Lower fees and costs

A robo-advisor can save you a lot of money in fees and ongoing costs. We remove human advisors from the equation—unless you want them. When you have Assets Under Management (AUM) with a robo-advisor, the fees are typically a fraction of what you’d pay for a financial advisor.

Our fees are just 0.25% annually. With a financial advisor, you’re looking at more like 1% to 2%. And since everything is based on algorithms, you won’t pay extra for rebalancing and making other changes to your portfolio.

5. Manage taxes

Taxes are one of the trickiest parts of investing. Sell for a profit at the wrong time, and you’ll be on the hook for short-term capital gains taxes. Sell the right asset for a loss at the right time, and you can offset taxes through tax-loss harvesting. Managing taxes wisely helps keep your gains consistent and maximize what you get to keep.

With a robo-advisor like Betterment, this can happen automatically if you elect this feature. The algorithm optimizes your portfolio to try and keep you from being hit hard by taxes. A financial advisor can do this too, but will usually charge an additional fee.

Put your financial goals on cruise control.

Investing doesn’t have to be difficult. And reaching your financial goals doesn’t have to take all your time and attention. With a robo-advisor and a smart strategy, you can create your plan and let the algorithms do the rest.

As one of the largest independent robo-advisors with billions in assets under management (AUM), Betterment can help you develop a personalized plan to help you achieve your financial goals.

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