Robo-Advisors 101: A Beginner's Guide to Automated Investing

While the thought of investing in the stock market can be a very exciting proposition, it can also be quite intimidating if you are new to it.

For a start, there is lots of complex jargon you need to get your head around, not to mention fluctuating markets and the seemingly endless array of investment options there are available.

So, it is not surprising that some people can feel overwhelmed, initially at least.

But what if there was a way you could invest without the stress of picking stocks or trying to time the market? 

Wouldn’t that be wonderful?

Well, thanks to robo-advisors, this is now entirely possible.

Here is our beginner's guide to automated investing with them.

What Are Robo-Advisors?

Robo-advisors are automated investment platforms that use algorithms to manage your portfolio.

Unlike traditional financial advisors, which, of course, require human intervention, robo-advisors use technology to analyse things like your financial goals, risk tolerance, and investment horizon before suggesting a tailored investment strategy.

Typically, they invest in exchange-traded funds (ETFs) that spread your money across different asset classes, such as stocks, bonds, and property, which provide you with diversification without the need for constant oversight.

Additionally, many robo-advisors offer features like automatic rebalancing and tax optimisation to help maximise your returns.

For example, Australians interested in passive investing might use a robo-advisor to gain exposure to the market without worrying about daily fluctuations, such as CBA's share price on the ASX.

How Do Robo-Advisors Work?

A robo-advisor uses computer algorithms to automatically create and manage an investment portfolio for you.

This portfolio will be based on metrics like your specific financial goals, risk tolerance, and when you want to see a return, which it understands by asking you a series of questions through an online questionnaire.

Once it gains this knowledge, it uses it to allocate its funds into a diversified portfolio of exchange-traded funds (ETFs) with minimal human intervention.

Cleverly, it also automatically rebalances your portfolio to maintain your desired asset allocation over time.

Pros of Using a Robo-Advisor

For those tempted to use a Robo-Advisor, there are several benefits to doing so.

One of the most attractive is that they come with much lower fees than traditional financial advisors, who usually charge at least 1% of assets under management (AUM) or more. Robo-advisors, on the other hand, often charge less than half that amount, which makes investing a lot more affordable for people.

Additionally, they make investing very easy to do because you just follow their prompts on your mobile phone or computer and let the platform do the rest. They also enable you to diversify your portfolio to reduce your risk and will automatically rebalance it if market fluctuations can cause your asset allocation to shift.

Robo-advisors follow a long-term strategy, which means you don’t have to stress over the movements of the daily market because your investments are designed to grow steadily over time.

They also tend to have low minimum investment requirements, which makes them a great option for beginners who want to start investing with a small amount of money.

Cons of Using a Robo-Advisor

Like with anything, there are some drawbacks to using a robo-advisor.

For a start, while robo-advisors offer tailored investment strategies, they don’t provide the same level of customisation as a human financial planner. So, if you have complex financial needs, such as investing in foreign stocks, you may require additional guidance to be successful.

Of course, being fully automated, there is no human interaction, which some investors might not enjoy. That said, some robo-advisors offer hybrid models with human advisors, although this often comes at a higher cost.

Some people think robo-advisors are a guarantee of investment success, but this is not true. Just like with any investment, your portfolio will be subject to market fluctuations, and while they might help to mitigate risk through diversification, they cannot eliminate losses.

Who Should Use a Robo-Advisor?

Robo-advisors are perfect for those who are new to investing and don’t want to manage their portfolio manually.

They are also ideally suited for busy professionals who don’t have the time to research and track their investments and those who want to avoid high fees charged by traditional financial advisors.

If you plan to be a long-term investor who wants to adopt a passive, diversified approach to wealth building, they might also be a good option.

However, if you need detailed financial planning, tax strategies, or estate planning, consulting with a human financial advisor might be a better way to go.

Top Robo-Advisors in Australia

If you’re interested in using a robo-advisor, there are several popular options available to Australian investors.

One of the most trusted is Stockspot, which was one of the country’s first robo-advisors to be launched. It focuses predominantly on low-cost ETF portfolios and offers automatic rebalancing.

If you are a beginner, Raiz is ideal as it allows you to invest small amounts by rounding up your everyday purchases and investing the spare change.

Other options like Spaceship offer themed portfolios, such as those focused on global technology companies, which might appeal to younger investors, while Six Park and InvestSMART are also solid choices.