Revolutionize Your Investments with Automated Investing

Automated Investing Meaning, Types, & How Does It Work

We all have different financial goals, and to fulfil these goals, we often try different ways and take suggestions from experts. But they often turn quite expensive, which again makes us look for other cost-effective options. Well! The good thing is that something called Automated Investing works for you to fulfil your financial goals. If you want to ensure that your investing continues at a steady pace, have a look at Automated Financial Investing.

Key Highlights

  1. Automated investing is a method of investing in which computer algorithms and mathematical models are used to make investment decisions and plans.

  2. Automatic investment follows an approach based on risk tolerance investment goals and other factors.

  3. Automatic investing has a few pros: it is cost-effective and makes investment plans according to investors' needs.

What is Automated Investing? 

Automated investing means contributing money to your investment account. But the best thing is that it is done automatically to keep your saving plan on track; it doesn’t matter if you remember it. It is a type of investing where computer algorithms are used to create a financial plan for you. It is also known as robo-advisors, which have low fees, minimum balance requirements, digital applications, and a sophisticated approach to investing. It is done with little or no direct human effort. It can be an ideal choice if you want to start your wealth-building journey. 

If you look deep into automated investing, you will see that it uses computer algorithms to select and trade stocks, exchange-traded funds, and other assets without needing a financial advisor. If you are an investor, then automated investing has eliminated the need for a middleman who delivers investing services directly to you.

How does Automated Investing work?  

  1. Collecting information: Automated investing platforms are created in such a way that they guide investors by conducting online surveys where they gather information about their financial status, risk tolerance, and financial objectives. It is also known as the set-up stage, where you connect your new investment account to a bank account to fund it. Here, you make an upfront deposit to start your automatic investing journey. 

  2. Utilising information: The automated investing platform uses this collected information. It has computer algorithms that recommend and manage an investment portfolio to reach your financial goals. It provides services like portfolio rebalancing, tax-loss harvesting, etc., depending on your preferences. After completing the questions, the application allocates your cash according to your needs. It uses the information to diversify and minimise risk. They mainly rely on low-cost mutual funds or index funds.

  3. Customising investment: These automatic investment applications go beyond mutual funds and ETFs and use your investment goals to decide how your assets must be allocated. It is quite simple as your investment portfolio to save for your home in the short term will look different than the portfolio to see for retirement in the long term.

  4. Automatic portfolio checks: Market conditions keep changing, so your portfolio must be adjusted accordingly. Automatic investment applications like Robo Advisor adjusts your portfolio and align with your goals to reach them on time. Sometimes, the robo advisor rebalances your portfolio according to market conditions.

Know the Types of Automated Investing  

1. Pure robo advisors

Pure robo-advisors rely on algorithms and computer models to make investment decisions. They first ask about your financial situation and future goals through an online survey. Then, using this data, they give you an investment plan and automatically invest for you.

2. Hybrid robo advisors

Hybrid robo advisors also offer an automatic investment plan, but here, you can use your knowledge and expertise to make more defined financial decisions. Some hybrid robo-advisors use algorithms and tips from financial experts to tailor your investment. Considering your risk tolerance, this gives you a balanced portfolio to fulfil your financial goals.

3. Socially responsible investing

Socially responsible or social investment considers a company or business's environmental impact. It is made by selecting companies with good social value, socially conscious mutual funds, or exchange-traded funds.

4. Goal-based robo advisors

Gold-based robo advisors make investment strategies, keeping specific financial goals like purchasing a house or investing for retirement.

5. Robo tax loss harvesting

Robo tax loss harvesting creates an investment plan in such a way that it minimises the amount of tax you owe. It involves selling securities that have lost value to offset capital gains and reduce your tax bill.

Is automated investing a good idea?

Robo-investing is a good idea as it has many positive sides.

1. Saves time

If you want to start investing, it requires more research, time, and energy. Moreover, there is no guarantee that your selected investment will perform as expected. This is why automatic investments are created for investors who don't have the time and energy to make an investment plan and need more investment knowledge. Automatic investments let you decide how much you want to contribute and your goals. All you need to do is revisit your goals and asset allocation yearly.

2. It can grow your wealth over time.

Automatic investing ensures that you invest a specified amount promptly and consistently to reach your goal and actively engage in your investment plan.

3. It avoids emotional investing.

Sometimes, we emotionally make investment plans when tempted by particular stocks or funds. You may even be tempted to cut your losses and pull your investment when the market is red. Automatic investment helps you keep your emotions out of your portfolio to stay on track.

4. It safeguards your investment funds.

Automatic investment requires you to transfer your funds into your investment account manually. If these funds can easily be transferred or you can easily access that fund, they are at risk. You may even forget to transfer those funds on time. Therefore, automatic investing does this heavy lifting and safeguards your investment funds.

Risk in Automated Investing

Automated investing is a good option, but it does have some risks.

1. Risk of overdrawing

If you have a retirement plan and continuously contribute to a 401k, you directly pay from your paycheck before it gets into your bank account. But if you automate your investing in a brokerage account or IRA, you contribute from your checking or savings account; therefore, you need to transfer a specified amount into your account, or else your account will face the risk of overdrawing.

2. Remember to check your investment.

A balanced portfolio means you have specified your risk tolerance and investment goal; however, your ideal asset allocation may change over time due to some market conditions. The value of your investment will also change, and sometimes, it may leave your portfolio either too risky or too conservative; therefore, it is important to rebalance your investment to reach your goal periodically. Automatic investing helps you handle this idea, as you may need to remember to revisit your investment portfolio.
3. Other risks

Automated investment involves other risks as it lacks personalised advice and a personal touch. You might also encounter some technology risks as it is susceptible to technical glitches, errors, or cyber security risks. Automated investment may react to market quality; sometimes, investors' long-term goals and risk tolerance may not align.

How do I automate my investing? 

Automatic investment is quite easy. You only need to review the platform before setting up an investment account. 

  1. Create an investment account: To set up an investment account, you need to choose a user ID and password for your account. Then, select the type of account you want to prepare, like a taxable investment or IRA account. If you want to take advantage of advanced trading, you need approval to open a certain brokerage account.

  2. Choose your asset: Like robo-advisors or other applications, the platform requires you to answer several questions about your goals, risk tolerance, time horizon, etc. If you want to open a retirement account, you are given a list of investments. It includes a self-directed investment account offering thousands of stocks, bonds, ETFs, and mutual funds.

  3. Link your funding account: Link your checking or savings account from which you want to transfer funds to your investment account. You will need the financial institution's name, bank account routing number, and account number here.

  4. Set your funding schedule: The robo advisors or other investment applications want you to select how frequently and how much money you want to transfer from your bank account into your investment account. Select your funding schedule and get started with your investment plan.

Final words

Automated financial investing has changed the investment landscape, which offers efficiency, accessibility and customisation. It ensures your financial goal aligns with your risk appetite. It balances your portfolio on your behalf and makes sure market volatility doesn't badly hit your investment.

Read Also:

  1. Debt Security Investment

  2. Real Estate Investment

Olivia Johnson 05 Oct, 2023


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