In today’s digital day and age, everything is running on automation (nearly) and when it comes to finances, the term robo-adviser has become more and more common. Some of you may be asking “what ?! how can I leave my hard earned money to the robots ?!”
We understand you, and let’s find out what these robo-advisers are and get to know them better.
What Are Robo Advisers ?
So what exactly are robo advisers ? Are they like chat box that we speak to ? Or are they like a robot behind the screens that decides on what to do with our money ?
This might really disappoint some of you but robo advisers are actually just apps that runs on data. Data that come from both you (directly) and also data from past investments / market performance.
What are Some Important Data?
Robo advisers work mainly through data that is fed to them. With these data and the algorithm that each company uses, they will churn out the best decisions to execute each trades with the main intension of making a profit for their clients – You as a user.
1. Data from You.
Typically, before you start giving them your hard-earned money to manage, there will be some questions that they will ask you. Some of these (but not limited to) can be
a. Risk Appetite How much risk you are willing to take
b. Investment Goals You Might have Usually will be defined by percentage of returns, always remember “Higher the reward, higher the risk”
c. Monthly Investment Amount How much do you plan to invest / commit each month
d. Preferred asset allocation This can be in terms of where you would like to invest your money in (in any specific sector for instance)
2. Data from Past performances
We all know that data is the asset of the 21st century. Just like how the technology companies often use data that they must generate profits, we too as investors can leverage on data to generate some investment profits.
These past performance data such as the market trends, reaction or patterns that are filed with mathematical formulas as well as charts will be fed into these ‘robots’ to be studied and predict future performances.
With data from both you as an investor as well as from the market’s past performances, these robots will decide on making future trades for you, with a fee.
Investing With Robo Adviser Today.
However, as robo adviser gain more and more popularity, companies running these robo advisers are starting to create their own portfolio out of the algorithms and data that they have been working with.
Hence, it is often considered very similar to a managed funds.
The main difference? Managed funds are managed by human, fund managers that execute the trade of buying and selling the stocks in their funds based on their expertise and experiences.
Whereas with a robo-adviser, the trades are executed based on their predictions, which are based on data.
Should I go with Robo Adviser?
Indeed, with data comes an advantage position to be in. And actions backed by data often seem to be the perfect way to beat the market.
On top of this, robo-advisers do not fall for any human bias that people may have when they are managing your money.
The icing on top of the cake? They charge less fees! Looks like a perfect combo and place to start off investing right?
Here’s why you should consider first
Indeed, robo adviser seem to be the most convenient way to start with investing, especially when we can start with just a few clicks at the comfort of our home.
However, here are some reasons why you might want to reconsider.
1- They may not know you enough
At the end of the day, these are robots that you are dealing with. Ever felt frustrated when Siri or Jamie from our chat box just couldn’t get what we were trying to ask?
Similarly, these robots may not really get what you want.
2- The market reacts differently
Indeed, market seem to have a cycle, a trend seems to pick up. However, who would have known things like COVID-19 or the reopening of economy or rise in interest rates.
These factors which affects market reaction may go undetected by these robots… because they may not have been reading the news like what fund managers might be doing.
3- You may not know exactly what you want
For the first time investors, robo adviser might seem to be the ideal way to start off with.
Indeed, it can be overwhelming deciding on where to invest, how to invest and how much to invest. Going with a robo-adviser may seem to the approach to take when it is so convenient.
However, approaching someone who can hear you out, giving you a advice based on your current situation, one that is able to relate and understands what you are going through might be an alternative to receive a more relevant advice.
Getting Advice
Robo Advisers are here to stay to give us advice as they learn more through algorithms. Their prediction may not be right all the time, but one for sure is their fast-learning algorithm as well as consistency.
However, if you would like to hear us out and get a human touch and understanding advice, feel free to chat with us today!
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Learning about financial literacy can also be fun and easy! Stay with us in this financial journey one post at a time to find out how! If you haven’t already, you can check out our other work down below too, happy learning and reading!
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