You are out of debt, matching or exceeding your employer’s contribution to your 401K, and have some money left over at the end of each month. You’re ready to dip your toes into investing and are thinking about the stock market. Where do you even start? Luckily some extremely handy tools have been released in the last few years that can help you build a solid diversified portfolio from the very start of your investing career. These new tools are known as robo-advisors, and they can be a solid block in the foundation of your financial freedom.
Robo-advisors are basically automated stock brokers. You deposit money into the account, and it automatically purchases a mix of stocks and bonds for you. This makes them easy to use, and you can get started with most of the robo-advisors out there in just a few minutes.
Step 1: Get an account at the robo-advisor of your choice and link a bank account to it. I have a checking account linked to Betterment, the robo-advisor that I currently invest with. There are several robo-advisors out there now, most of them being pretty comparable to each other. Betterment, Wealthfront, and Acorns are generally cited as leading the way for the industry, but I encourage you to do your own research. You can do a few searches and read some reviews to find an advisor that you like and works best for you. Acorns for instance rounds transactions while Wealthfront can directly buy stock for higher balance accounts. Many banks and brokers have realized the power of robo-advisors and are starting their own services such as Charles Schwab’s Intelligent Portfolio. This is useful if you wanted to keep all of your accounts together and your bank/broker offers this kind of service.
Step 2: Do the “retirement guide” portion of your profile. Robo-advisors often use a quick assessment they refer to as a “retirement guide” to gauge how long you likely have until you retire. This allows them to gauge the amount of risk you should be taking so they can invest your money accordingly. Betterment allows you to manually adjust your risk level after the assessment if you would like. The more stock exposure you have, the more risk. Higher risk over time often equates to higher returns in the long run. Lower risk investments like bonds tend to be more stable meaning there are less short term losses but they earn less over long periods. Use the “retirement guide” as a starting point and manually adjust your risk level if you feel the need to.
Step 3: Deposit money. Your money will be automatically invested and you’ll be able to see a breakdown of where you money is. You can track your overall performance on the front page under “What you’ve earned” and the “Returns” section on Betterment.
Step 4: Leave your account alone (other than investing more into it). One of the biggest mistakes that normal investors make is to follow the market and react when there is a downturn. Just like a 401K, which is also stock, you never lose money when the market goes down, you lose value. You still have the same amount of stock, each stock is just worth a little less than before. When the market goes up those shares are worth more. You won’t *actually* make or lose money until you cash out.
Above is a chart of one of the stock market indexes over 10 years (this is the DJI). It is a good basic representation of the markets and what occurs in them. You can see that over a 10 year period the stock market trends upwards. You can also see the crash of 2008 in this chart and how severe that was for investors. Many people who were scared by the crash “cashed out,” losing large amounts of money. The people who didn’t react and left their money where it was made up their losses by 2013 and are looking at gains today. This doesn’t take into account dividends (interest payments made to you from the stock) or if those people continued to invest (buying low in 2008-2010). My own personal rule is to leave it there if I am more than 5 years away from retirement. Once I am that close then it is time to pay attention to the market. If you were an investor in 2008 the best thing you could have done is continue to invest.
Fees: Robo-advisors are typically not free but are much less expensive than traditional advisors. Almost all robo-advisors have fees which vary depending on which robo-advisor you are looking at. For Betterment the maximum fee is only 0.35% per year. Your dividends alone pay for that and more. Check your robo-advisor’s site for their fee structure.
These new services can be a lower risk with a lower fee structure to build the basis of a solid portfolio for both new and experienced investors. Their ease of use can help those who have never invested before take the first steps towards getting their money to work for them. We all know that to get to financial freedom we need to make our money work for us and a savings account is not the place for that. These new services provide a gateway into investing for virtually anyone who is interested in making their way towards financial freedom.
For those who are interested I will be digging into the specifics of my robo-advisor of choice, Betterment, in next week’s article.