July 12, 2022
“Hey, how do you keep track of your portfolio on a regular basis?”, you ask one of your tech-savvy friends.
“I don’t! I simply rely on the auto-adjust feature and let the experts do the work for me “, he quips.
Portfolio management can be a tough ordeal and with several Robo-Advisors claiming to take the burden off your shoulders, they can be a useful approach for certain individuals.
Betterment’s Automatic Allocation Adjustment is one such Robo-Advisor where it automatically adjusts your level of risk and allocation over time, helping you maintain a recommended risk level throughout your life.
Betterment aims to reduce your account’s risk as tax efficiently as possible by periodically rebalancing your portfolio for you. All you must do is set your target goal and the auto-adjust feature will build a strategy and portfolio for you, while you take a nap.
Pretty sweet, right?
But before you make an impulsive decision, let me walk you through some of the advantages and disadvantages of Robo-Advisors and if it truly is the best way to manage your portfolio.
If you are a complete stranger to the world of investing and feel a chill run down your spine at the thought of planning your finances, Robo-Advisors are a perfect way to start your journey, by filling a simple questionnaire indicating your investment goals and risk tolerance.
You will spare yourself the trouble of researching through individual stocks, mutual funds or any other assets to diversify your portfolio or going through the hassle of rebalancing your portfolio, reinvesting your dividends and let the Robo-Advisor do it all for you. Your only job is to fund the account.
If you are one of those who is always busy, and don’t have the inclination to take on another responsibility, but still want to invest and plan your finances, this could be a great strategy for you.
Mutual funds can have fixed minimum investment amounts coupled with steep asset management costs and you may not have enough money to begin investing. Robo-Advisors can offer flexibility and let you begin investing at a fraction of the cost.
While all the above points are great to hit the auto-adjust button immediately, let me ask you a simple question -
Why do you want to invest?
If you are content with average returns, and your primary goal is capital preservation and not to get rich, read no further.However, for most of us who invest in the market, we want to make our investments in high growth assets where at the end of the day, our money works for us and not the other way around.
Investors who spend hours learning about companies, reading financial reports, keeping track of global economic activity while juggling through their day jobs and paying bills are hungry to beat the market. An automatic allocation adjustment will invest your money with a diversified approach and while this will help you weather a storm, it most certainly will not offer an investment return greater than the stock market.
If your investment goal is to beat the market, not just match it, switch to Passiv’s DIY Investing approach.
With a do-it-yourself investing approach, you are taking complete control over your investments in hopes of beating the market and growing rich. For example, if you believe the pharma sector is going to see significant growth looking at the current times and outperform all other sectors, you could invest a larger percentage of your portfolio in pharma, which you would otherwise not be able to with the auto-adjust approach.
Similarly, most Robo-Advisors typically invest in index funds while diversifying your investments through bonds and fixed income securities. With a DIY approach, you could select from a variety of actively managed funds which work hard to beat the market.
Here are a few strategies to beat automatic adjustment allocation:
Research is an integral part of investing and if you aren’t spending enough time keeping track of the market and learning about the companies you invest in or plan to invest in, you are off to a start on the wrong foot.
For example, let us say you wish to invest in an upcoming technology company. Before you jump in to buy its stock ask yourself the following questions:
- Have you read enough about the company and its products, services?
- Does the company management have a good reputation? Who are their investors?
- Have you read their annual report and understood their vision for the company?
- What has the company performance been in the past three years?
- Does the company owe a lot of debt? If yes, why?
Is the company paying dividends to stockholders?
- Does the company have stable cash reserves to weather a storm?
It may sound like a lot of work, but due diligence is the key to making sound investment choices.
You must have a crystal-clear idea about your personal goals towards investment, which will make it easy for you to have a plan and a strategy.
For example, if you can only afford to invest $100 each month, how do you wish to make your choices? Plan your investments around this monthly amount, and you will find yourself leaning towards a balanced approach instead of throwing all your money away without caution.
Do not put all your eggs in one basket, and no matter which age we live in, this saying remains true for all investments. While you efficiently research the companies and mutual funds you invest in, understand your risk tolerance, and plan your investments accordingly.
If you are young, you have time on your side and can afford to take more risks and invest in risky assets. For someone nearing retirement, having a more risk averse attitude is your best bet.
For example, if you own a mix of mutual funds in your portfolio, split your investments between large cap, mid cap and small cap equity funds based on your risk tolerance. A large cap fund will provide a safety net in case the markets are in turmoil while small and mid-cap funds have the potential for explosive growth to beat the market.
If you follow any of the mogul investors of our time, there is one thing common between them – they are always informed. This is not just staying informed about company financials or market situations, but also to be informed about global economies and their impact on capital markets.
Stay informed about current affairs, new developments within sectors you follow, key management decisions as well as geopolitical developments.For example, if a listed company is on the verge of producing the next big thing in technology, give yourself a head start by being an early investor with the power of information.
It can be easy to lose sight of your goals, especially when the markets are in a state of turmoil. However, do not let your emotions take control and stand your ground, realizing that the stock market always works in cycles. Stay invested and commit yourself for the long run.
In the end, choosing between a Robo-Advisor and a DIY approach is personal and depends on your priorities. If you wish to beat the market, however, you must take control even if it demands more of your time and energy in exchange of greater returns.
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