In investing, a lot of folks have offered up their own solutions over the years: books like The 10-Minute Investor or portfolio strategies like the couch potato or “lazy” methods, or even all-in-one portfolios offered by big institutional investors. All these things try and do one thing: Make your money grow more efficiently, painlessly and cheaply.
Hey, that’s something almost everyone can get behind. But often, like a fad diet, a gimmick or quick-fix is not a solution. Someone’s making a living appealing to our desire for simplicity, but ultimately, these solutions have not really worked all that well for the person that matters: you.
There is still a massive savings crisis underfoot in the United States (due to a number of factors) and the investing industry has not done enough to address it. Because, let’s face it, investing properly always seems riddled with too many trade-offs. It’s often a game of one step forward, and two steps back.
Typical trade-offs investors face:
|Pay high fees to outsource financial management to another person.||Spend your own time and energy researching, learning, and stressing about your investments|
|Get generic, one-size fits all portfolio or target-date fund.||Attempt to learn everything there is so you can do it yourself.|
|Keep your portfolio super simple so that you don’t have to manage it much, but have a lower risk-adjusted return.||Get higher risk-adjusted returns from more asset classes, but spend more time managing it.|
|Pay more than you should in taxes.||Hire, or become, an accountant.|
Modern computing=no more tradeoffs
But there is another option, thanks to modern computing. It’s called efficiency. That’s what new online financial advisors and portfolio managers, places like Betterment for example, are doing for investors: Making it simpler to manage investments while getting the right advice for your personal situation.
At the heart of these online financial advisors are intelligent algorithms that automate the processes that are key to smart investing, like rebalancing, tax optimization and strategic dividend reinvesting.
Algorithms=Where investing and efficiency meet
Automation is increasingly a necessity as growth and volatility are essential components for a modern portfolio. Take emerging market bonds, for example, which are a great diversifier and a key component for any portfolio aimed at growth. However, they are also quite volatile, similar to stocks.
A portfolio that includes emerging market funds will therefore need more frequent re-balancing than one without these kinds of funds. That’s why it’s so helpful to have an automated investment platform: software can constantly monitor and then rebalance an investment any time it is necessary. A far cry from quarterly rebalancing typical in the old days.
In the face of increasingly complex financial products—and some totally absurd ones (the Winklevii and their bitcoin ETF, anyone?)—simplicity is more essential than ever.
We can all relate to some kind of inefficient system that has been made better with technology (checking in for a flight over email; using a smartphone to deposit a check).
Investing is no different today.