4 Simple Reasons Why you Should Fire Your Robo Advisor and Manage your Own Investments
You don't have to be rich or an expert to start investing and building long-lasting wealth. You can choose between hiring a robo advisor vs treading the course alone. In this post, I show you why you might want to fire your robo advisor and manage your own investments. Let's first understand what a robo advisor is.
Understanding robo advisors
Robo advisors are digital platforms that use computer algorithms to automate investing. Their idea is to essentially eliminate or minimize human intervention. They normally allow people to invest through an app. After entering a set of information during account creation, including age, salary range, risk tolerance and investment goals, among other parameters, they will provide you with an investment portfolio. Oftentimes, that portfolio is composed of a few low-cost mutual funds. A few well-known robo advisors include Acorns, Wealthfront, Wealthsimple, Betterment, etc. Here are 4 reasons why you may not need robo advisors.
1. You have a basic knowledge of mutual funds
Robo advisors use a combination of low-cost mutual funds, including index funds and exchange-traded funds to construct a diversified investment portfolio. An index fund (video) is a special type of mutual fund that tracks the returns of a broader market index (e.g. the S&P 500, NASDAQ, etc.). An index fund doesn't try to beat an index, in terms of returns; it seeks to match or give the exact same returns as the index it tracks.
An exchange-traded fund or ETF (video), on the other hand, is a type of mutual fund that has benefits similar to both stocks and index funds. Like stocks, ETFs are traded actively on a stock exchange. As a result, their prices change constantly, as investors buy and sell corresponding shares. Both index funds and ETFs have extremely low expense ratios. Check out the similarities and differences between index funds and exchange-traded funds. Robo advisors don't have to do much heavy lifting; index funds and ETFs are passively-managed investments. Once your portfolio is created, it just cruises on autopilot! You can set it up yourself using the same low-cost mutual funds that robo-advisors use!
2. You want to pay even lower fees
Robo advisors charge very low management fees, usually less than 1% (0.20% to 0.75%). Those management fees may be small, but when your investment balance is relatively large, such fees can diminish your returns. Legendary investor Warren Buffett has two simple money rules: "Rule No. 1: Never lose money. Rule No. 2: Never forget rule No. 1." By paying management fees, you are in fact losing money, violating Warren Buffett's #1 money rule.
3. You want to beat the market
Passive investments, like index funds and ETFs, can never outperform the market. Since robo advisors construct your portfolio using such investment vehicles, you can't expect them to outperform the market either. The only way they can try to outgain the market is to incorporate actively-managed mutual funds into your portfolio. However, they are unlikely to venture into the realm of active mutual funds, as this is contrary to their core objective of passive and automated investing. If you want your investments to yield higher returns than your robo advisor can provide, the opportunity may be right for you to manage your own investments.
4. You want more control over your investments
If you want more control over your investments, including buying and selling power or alternative investment types, your robo advisor needs to go. When you manage your own investments, other investments you may consider for your portfolio include but are not limited to individual stocks, marijuana stocks or ETFs, and real estate investment trusts.
The bottom line
Robo advisors are a good choice for the newbie investor. But an investor who has a basic knowledge of mutual funds, wants to outperform the market, desires to pay no management fees, and commands more control over his/her investments, may decide to fire his/her robo advisor!
Like this article? Please share and leave us your feedback in the comment section and help us improve and grow. Subscribe below to get our latest articles. Here are a few other articles you may find useful: How to earn free money as a micro investor | How to invest $100 | How investors make money in the stock market | Stocks vs. index funds vs. ETFs: differences and similarities | I heeded Warren Buffett's advice. I can't stop winning | 2 simple reasons why you don't need bonds in your portfolio.