Robo-advisors promise hands-off investing, while do-it-yourself investing offers finer levels of control and higher potential. Which is right for you?
Like with everything these days, robots are making it easier for common folk like you and me to invest. However, are robo-advisors really that good at their jobs? Can you really be a successful investor without learning financial basics like economics and the market?
Can a computer programme achieve a better understanding of the complexities of trading over a living, thinking human being? Or should you commit the time and effort to learn the ins and outs of trading because nothing beats personal experience?
Should you trust the shiny promises of robo-investing, or stick with the grizzled old ways of do-it-yourself investing?
What is robo-investing?
Robo-investing is short-hand for investing with the help of a robo-advisor, which, more savvy readers would know has been all the rage since around two years back.
Once again proving the saying ‘there’s an app for everything’, robo-advisers are investment platforms that use a series of algorithms to handle your investments.
(Note: An algorithm is a set of instructions that tell a computer how to solve a problem. In this case, how to make capital gains while avoiding losses, according to risk appetites.)
All you have to do is to sign up for an account, pick a plan that suits your risk appetites and investment objectives, put in some money and wait for the magic to happen.
You can easily check how your investments are doing at any time via your mobile or computer, make adjustments to your selected plans or sign up for new ones, deposit more money for investing, or even withdraw part or all of your account.
Some robo-advisors require very low starting amounts, as low as $50 or $100 – even $0. But of course, you will need to invest consistently and at sufficient amounts before you can start increasing your wealth.
Pros and cons of robo-investing
|Pros of robo-investing||Cons of robo-investing|
|Easy to start, able to stop without penalties||Cannot pick specific investments or products, for example, a particular wine fund|
|Flat fee structure, often one charge per year based on your investments||Limited freedom to capitalise on market events|
|Investing made easy, little to no knowledge required||Simplify investing without fostering knowledge of markets and financial systems|
|Convenient way to passively grow wealth||You may not know exactly what or who you are investing in|
Who is robo-investing for?
In a nutshell, robo-investing is great for you if you are looking for an easy, low-commitment and passive way to grow your wealth. All you need to do is to invest consistently and sufficiently, and you’re all right with that.
Because you’ll only be able to choose from a limited selection of pre-constructed plans and portfolios, you won’t be able to choose exactly where your money is going. You have little to no control over which fund, asset class, sector or company you will be investing in.
But you don’t really care about that; all you want is a portfolio that matches your risk profile and financial objectives.
But hey, fair game; in an increasingly complex and busy world, we could use whatever forms of simplicity we can get, so no judgment here.
Then again, there’s nothing to stop you from learning the ins and outs of investing on your own. If you’re the type to do that, then there’s a good chance you also won’t feel comfortable deferring to the algorithms, which are, after all, programmed and managed by humans.
To sum up robo-investing in one sentence: Come for the convenience and low bar to entry, stay for the hands-off investing.
Understanding Do-It-Yourself (DIY) investing
What is DIY investing?
DIY investing simply means making investments in the market yourself, buying and selling securities and stocks and shares on the market with the goal of making capital gains while avoiding losses.
There’s a mind-boggling array of things you can invest in, ranging from things you can see and touch like food crops (rice, wheat, cattle), energy products (oil and natural gas, green energy), and precious metals (gold, silver, aluminium) to things you can’t such as directions (CFDs) and erm, imagined money (cryptocurrencies).
But perhaps the most salient investment products are stocks and shares, which everyone knows to ‘buy low and sell high’ as a way to get rich.
However, the sheer complexity of the market makes DIY investing a highly skilled discipline that requires rigorous commitment and study in order to succeed.
Pros and cons of DIY investing
|Pros of DIY investing||Cons of DIY investing|
|Potential to earn high capital gains very quickly||Exposure to high risk and losses, mistakes can be painful, even punitive|
|Virtually unlimited asset classes and products to invest in, can fine tune your portfolio to your exact preferences||Can be very complex and detailed, requires moderate to high amount of attention|
|Opportunity to learn and expand your knowledge of economics and the financial system||Dizzying array of masters, methods, formulas, secrets out there, can be difficult to separate the wheat from the chaff|
|Will discover more about your own personality||High levels of discipline required for consistent results|
Who is DIY investing for?
When it comes to DIY investing you’ll need to be self-driven, committed and disciplined, with moderate to high levels of knowledge and experience in order to succeed. The barrier to entry can be high, and mistakes can be expensive.
However, in return, there’s the potential to make loads of money, sometimes very quickly (if only I had put down $100 for Bitcoin way back then, I’d be typing this on a solid gold keyboard).
And if you possess that rare gift of being able to spot tomorrow’s top brands and companies (or conversely, sense which titan is headed for a downfall), how climate change will affect water supplies, or even which way prices will go, you can make a pretty good living as a trader.
There is lots to learn, experiment and think about here, but the payoff goes beyond just money. You can develop entire careers out of simply helping others to succeed at DIY investing.
Which should you choose, robo-investing or DIY investing?
|Knowledge required||Low||Moderate to high|
|Level of attention||Hands-off, passive||Hands-on, active|
|Range of products and markets||Narrow||Broad|
|Fees||Flat free structure, often once per annum||Many fees to track and pay, depending on product|
|Commitment required||Low, start and stop at anytime||High, may feel need to time the market|
|Risk levels||Low, risks are managed||High, have to manage risks yourself|
|Returns||Depends on overall performance of your robo-advisor||Varies widely according to your investing style and risk appetite|
If you’re still somewhat undecided, well, life isn’t black and white, and there are more than two flavours of ice cream.
Why not try both? Split your investment budget into two, and use one portion for a robo advisor. Then use the other portion and start investing on your own (but do keep to beginner friendly investments unless you’re absolutely sure of what you’re doing).
After 12 to 24 months, compare your returns. The method that gives you better results is probably the one you should stick with.
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