The Beginner’s Guide to Automated Investing

Automated investing uses technology to manage your investments without the need for active management. From picking stocks to balancing your portfolio, automated investing may suit those looking for a lower-cost, hands-off approach to wealth management. 

In this article, we’ll cover:

• What automated investing is
• What automated investing can do
• Automated investment tools
• Pros and cons of automated investing
• Who automated investing is right for
• How to get started with automated investing

What is automated investing?

Automated investing is an umbrella term for a range of tools and technologies that reduce the need for hands-on investment management. By using algorithms and mathematical modeling to automate processes that have traditionally been done by financial advisors, these tools can make investing more accessible and less stressful. From robo-advisors that tailor a portfolio to fit your goals and risk tolerance, to features like automatic rebalancing and dividend reinvestment, automated investment reduces the heavy lifting for individual investors.

What can auto-investing do?

At their core, automated investing tools aim to optimize and personalize your investing experience. From getting started as an investor to managing your portfolio over time, an automated investment platform can provide a range of functions:  

• Provide recommendations: Automation tools analyze your risk tolerance, investment goals, and time horizon to craft personalized investment advice and suggestions for securities you may want to buy.  
• Build or assign a portfolio: Based on your individual profile, auto-investing tools can either create a customized investment portfolio for you or assign one that’s pre-built to match your goals and desired risk level. 
• Balance and rebalance your portfolio: Automated investing tools can help determine the right asset allocation for your profile at the outset. And they can also support easier portfolio management by rebalancing to maintain your target allocation of asset classes, like stocks, exchange-traded funds (ETFs), mutual funds, bonds, and bond ETFs.
• Invest regularly: Automation helps you maintain a steady commitment investing by transferring a set amount of money into your brokerage or retirement account on a regular schedule. This way, you consistently contribute to your portfolio without even having to think about it.
• Optimize taxes: Automated investment tools can employ strategies like tax-loss harvesting to minimize your tax bill on investment gains. Optimizing your tax liability means you keep more of what you earn on your investments.

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Automated investment management tools

With technology advancing quickly, there are a variety of automated investing tools at your disposal. Robo-advisors might be the most common, but you’ll likely find additional features depending on the automated investment platform you use. These tools are all designed to make your investment management as effortless and efficient as possible.

Robo-advisors

Robo-advisors use algorithms to manage your investment portfolio, often with lower fees compared to human advisors. Typically, you’ll fill out a detailed questionnaire to create an investor profile, including information about your financial goals and risk tolerance. The tool will then use that information to match you with a portfolio that aligns with your needs. Once you’re set up with the ideal asset allocation, a robo-advisor makes investment management easier by rebalancing your portfolio to maintain it. Some automated investment platforms offer digital advisor tools with a specific focus, such as tax optimization or socially responsible investing. 

If you’re wondering how advice from a robo advisor compares to that from a human, it comes down to how information is processed and applied. Financial advisors rely on their market knowledge and experience, as well as their ability to be intuitive. Investors can benefit from these professionals’ ability to apply their expertise and intuition to each person’s individual circumstances. A robo advisor uses a unique algorithm and mathematical models to analyze market data and aims to give investors the best returns while taking into consideration their risk tolerance and financial goals. 

Recurring transactions

Automated recurring transactions put your commitment to investing on auto-pilot. By setting up regular transfers to your investment accounts, you can devote a portion of your paycheck toward investing on an ongoing basis. Automatic investing over the long term also helps you take advantage of dollar-cost averaging (DCA), a strategy that helps you spread out your purchase of shares over time so that the average cost per share is less affected by market ups and downs. 

Dividend reinvestment

Certain stocks and bond ETFs pay dividends, which are distributed to investors as cash on a regular basis. Reinvesting those dividends back into the stock or fund is a simple way to build up your portfolio. A dividend reinvestment plan (DRIP) automates this process so that you’re consistently adding new shares to your portfolio. A DRIP also helps you take advantage of compounding, which is when your earnings themselves earn a return. 

Micro-investing

You don’t need to invest a large sum of money to make an impact on your financial growth. Micro-investing platforms allow you to round up your everyday transactions to the nearest dollar and invest the difference, or invest small amounts alongside your purchases. It’s an easy way to build an investment habit without feeling the financial strain of a large deposit. 

Automated investing pros and cons

Automated investment can be an accessible option for beginners or those who prefer a more hands-off approach. But while it’s convenient, it might not satisfy every investor, especially those who want more control over their portfolios or have complex financial situations. Take a look at some of the pros and cons to decide if it aligns with your personal investing style.

Advantages of automated investing

Automated investing streamlines the investment process, making it manageable for a wide range of investors. Here are some key benefits to consider:

• Lower fees: The management fees charged by traditional financial advisors, brick-and-mortar brokerages, and mutual fund managers tend to be higher because they use human advisors. Automated investing platforms and robo-advisors often have lower fees because they rely on technology to provide investment advice and prioritize efficiency. 
• Convenience: Automation tools harness technology to make the investment process simple and convenient. Investors can set their preferences and let the tech handle the rest, from executing trades to rebalancing portfolios. 
• Consistent investment strategy: Automation can help you maintain a disciplined strategy. Regular contributions and automated portfolio rebalancing keep your investment goals on track, ensuring that your asset allocation stays in line with your risk tolerance and investment horizon.
• Diversification: Robo-advisors can help you spread your investments across a wide range of assets to reduce the risk of over-investment in a single asset or sector.
• Accessibility: With many automated investing platforms, you can get started with a small sum of money, making investing accessible even if your budget is tight. And because they’re digital tools, you can access and manage your account any time, from any place you have an internet connection.

Disadvantages of automated investing

While automated investment can certainly be convenient and accessible, it’s not necessarily right for everyone. Before you choose this approach, consider the potential downsides:

• Limited personalization: Automated investing might not always catch the unique aspects of your financial circumstances. While it can work well for many scenarios, automation may fall short for more complex financial landscapes or for investors with specific investment strategies.
• Over-reliance on algorithms: Automation algorithms might not always grasp the subtleties of market fluctuations or align perfectly with every investor’s specific goals. This could lead to a mismatch between the automated strategy and your expectations.
• Lack of human interaction: With automation, you miss out on the nuanced guidance, emotional support, and personalized advice that a human advisor can offer, particularly when you need to make a critical financial decision or navigate the swings of the market.
• Potential for complacency: Hands-off investing may inadvertently discourage you from getting a better understanding of your investments and the market. If relying on automation means you don’t learn about important investing topics, it could leave you less equipped to make informed decisions in the future.
• Less control: If you prefer a hands-on approach to wealth management,  automated investing may feel too limiting. Depending solely on automated tools to make investment choices for you means you won’t be making buy or sell decisions based on your own insights or market opportunities you want to take advantage of.

Who is automated investing right for?

Is automated investing a good idea for you? If you value convenience, a consistent investment strategy, and lower fees, it could be a great fit. On the other hand, if you’d rather get personalized investment advice from a human, or if you enjoy the process of actively managing your portfolio, a self-directed investing approach may better suit you.

To find out if automated investing is right for you, ask yourself the following questions:

• How much time and energy can I devote to investment management?
• Am I comfortable relying on algorithms to make investment decisions?
• Is my investment strategy relatively straightforward, or are there complexities I need help understanding?
• Do I prioritize convenience and low fees over personalized advice and control?

How to get started with automated investing

If you’re ready to start your journey as an investor, look for a brokerage that offers the automated investing features that appeal to you. Depending on your goals, you might want to open a standard brokerage account or a retirement account such as a traditional or Roth IRA. (Pro tip: you can have both.) Then determine how much you can invest based on your income. Remember, you can always start small; whether you’re investing $1,000 a month or $10 a month, the sooner you get started, the more time your money will have to grow. 

Even if you’re relying on automated investing tools, it’s a good idea to educate yourself about investing and the stock market. Familiarizing yourself with the basics, like stock market terms and how to read a stock chart, will keep you informed and empowered to manage your money wisely.

Unlock the potential of automated investing

Automated investing offers a straightforward path for anyone eager to get started in the investment world. With effortless portfolio management and personalized insights, you can easily start a regular investing habit without needing to be an expert. You might want to explore Stash’s Smart Portfolios, designed to match you with a diversified portfolio aligned with your risk profile. You can open an account online and get started with as little as $5 today.

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