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Why are online robo advisors the best way to start investing?
Well, for the last few months, I have been watching my colleague Laura radically change her mindset from the usual:
‘I don’t invest because I don’t know anything about it and I am so afraid to lose my money.’
into an entirely different state of mind, one that says something along the lines of:
‘Now that I have started investing I am really getting into it and just can’t wait to invest more.’
What a change!
How did Laura get started? She simply opened an investment account with an online robo-advisor. In fact, she opened accounts with two different platforms, just to learn and compare.
Robo-advisors are online platforms which invest your money based on an algorithm which uses a pre-determined investment allocation tied to your specific risk profile.
That means that no portfolio manager is deciding which stock to pick. The robo or algorithm does that automatically based on a set of predefined rules.
As a result to automation, online robo-advisors typically have low all-inclusive annual management fees ranging from 0.3% to 1.0%. Also, as robo-advisors often invest through Exchange Traded Funds (ETFs), there is another layer of cost for each ETF which typically ranges from 0.02% to 0.3%.
And in the long run, this is much more advantageous than the actively managed investment funds that are offered by traditional investment banks. These typically have management fees of 1.5% to 2.5% and usually also charge a set of other hidden expenses such as transaction fees, safekeeping fees, etc.
Another thing to note is that the robo-advisor only ‘manages’ your money. It doesn’t actually ‘have’ your money. This means that when you open an account, you do so with an established custody bank. This bank has a formal agreement with the online robo-advisor platform to let it ‘manage’ how the money gets invested.
So in the unlikely event that the robo-advisor would go bankrupt or otherwise disappear, your investments would still be safely seating with the custodian bank.
Now let’s take our usual ‘investing’ worries one by one and see how we can address them with an online robo-advisor.
1). I don’t know how to start
Online robo-advisors are probably one of the easiest ways to get started with investing.
The only hurdle is probably to choose which robo-advisor you want to use. There are about 30 of them active in Europe alone so it might be a little daunting to search for the right one.
But do worry no more! I created for you a comparison sheet of European robo-advisors which you can download here.
On there, you will find the countries in which each robo-advisor is active, what are the minimum investment required, their fees, and so forth. So review that list and pick the one that is right for you!
Then, go to the robo-advisor ‘open an account’ webpage to fill in the paperwork online.
For a few of them, you might have to send them your original passport or a certified copy of it. Or you might have to print the paperwork, sign it and send it per post along with identification documents.
Then, you will likely have to fill in an online questionnaire to assess your risk profile.
Once this is done, all you will need to do is wire the money. Once it hits your online investment account, the funds will be automatically invested as per your risk profile.
Actually, I once opened an account with robo-advisor Werthstein (which unfortunately no longer exists), and I was blown away by how fast it went and how easy it was.
I literally opened an account in less than 20 minutes while sitting on my couch at 22h on a Friday night (and yes, I know, it’s a lame way to spend a Friday night!). Everything happened online in one go, even the verification of my passport!
2). I don’t know anything about investing
Online robo-advisors are perfect for beginners. You don’t need to make any specific investment decisions. After you fill in the risk profile questionnaire, the online platform will allocate any money you send to it according to your particular risk profile.
This means it will buy a predetermined percentage of ETFs, stocks, and bonds or other traded securities to give you a balanced exposure that matches your risk profile.
All the work of choosing investments is done for you. And the algorithm ‘rebalance’ your investment every once in a while, usually quarterly. Rebalancing means that it adjusts your portfolio to make sure it continues to match the desired predefined allocation to the various types of securities.
In fact, there is not much you need to know when you start investing through an online robo-advisors.
But as with Laura, chances are that once you get started, you will get increasingly more interested in learning about investing.
Actually, rather than thinking ‘First I should learn, then I will invest,’ I would encourage you to do the reverse: ‘First get started because that’s how you will learn.’
3). I am so afraid to lose money
This is a valid concern. One that sooo many of us have. And rightfully so, because there are very many ways to go wrong about investing.
But as discussed in my prior article ‘Why I Am NOT Afraid to Lose Money,’ we put the odds on our side when we 1) invest passively, 2) choose low-cost investments, and 3) invest for the long term.
The great thing with online robo-advisors is that you can hit all three at once.
1) Invest passively: check
2) Choose low-cost investments: check
3) Invest for the long term: check, but please also refer to the Important Notice below before making any important investment decision
When you invest through an online robo-advisor, your money usually remains accessible to you, and you are able to withdraw it at any time. This is great because it gives you total control over your investments.
HOWEVER, this also means that you need to understand one of the basics of successful investing, which is that the performance of an investment portfolio goes up and down in the short term. And this can be very scary.
On the other hand, over the long term, good investments do increase in value, especially when considering the magic of compounding (If you don’t know what compounding is, just read my article: ‘Why I Am NOT Afraid to Lose Money’).
This is why an essential component of successful investing is to keep your cool when the markets go down. Just sit tight, continue investing, and trust that in the long run, it will be worth it.
4). I don’t have time to learn and look after my investments
Well, this one is easy. Because once you have opened an account with an online robo-advisor, there is just one more thing you should do:
Set a recurring payment order from your salary account to your investment account.
In other words, define how much you want to save each month, and create an automatic monthly transfer of this amount as soon as your salary hits your bank account.
Actually, this straightforward strategy is probably one that will help you build the most incredible wealth! So much so that I should probably write an entire article about it in the future (food for thoughts).
And once you have done that, there is not much else you need to do.
No need to keep watching the stock market and read all the financial news all the time (because remember: you are investing for the long term so what is happening right now is not so important).
No need to actively buy and sell securities (because remember: you have an automatic payment in place and the online robo-advisor does all the work for you).
5). What if now is the wrong time to start investing?
‘The stock market is so high right now that I should probably wait until it goes down before starting to invest.’
I hear you.
But I have a completely different view on this: the best time to start investing is always right now, regardless of where we are in the market cycle.
If you wait for a crash, it might happen soon, or you might wait for a long time. Nobody knows.
And once the crash is happening, it will be so scary that you will likely want to wait some more before starting to invest.
Then you might get busy with other things. Or you might lose time because you will not know where to start and where to open accounts and start investing.
Before you know it, the market will be up again, and you might start thinking that you should wait again for the next crash.
Fast forward five or ten years and you will not have invested a dime.
Not only you will have no return on your money, but you also won’t have learned anything about investing.
This is why with investing, the worst you can do is to do nothing at all. So download my list of online robo-advisors and JUST GET STARTED.
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DOWNLOAD THE LIST OF ONLINE ROBO-ADVISORS
Online robo-advisors are likely the best way to start investing. To help you choose the platform that fits your profile, I created a list of online robo-advisors active in Europe.
So sign up below to receive this precious list!