• Kavya Ravikanti

Should I use a Roboadvisor or Individually invest?

This comes down to how involved an investor you want to be. Roboadvisors are what we consider a Hands Off investing approach. Whereas Individually investing can be DIY or Hands Off depending on what route you take.


Typically the least involved process can be more costly. Let's break them down:


Roboadvisor


Hands Off Investing

Involvement: Low

Roboadvisors are tech companies (Wealthfront, Betterment, etc.) with algorithms to set up portfolios for you based on factors such as risk tolerance. This is what makes it low involvement, since you as an investor don't have to choose your portfolio.


Cost: Medium

Management and trading fees along with ETFs fees apply. When compared to a target-date fund (scroll down), roboadvisors are slightly more expensive, but you'll get more personalization and features such as tax-loss harvesting.


Process:

When you open up an investment account (retirement or non-retirement) with a Roboadvisor, you set up a risk tolerance level and answer a few other questions. The algorithm creates a portfolio for you and all you have to do is deposit money into the account and it'll do the work for you.

Individually Investing


DIY Approach: Buying and Selling Assets on a Brokerage*

*Ex. Brokerages include Vanguard, Fidelity, Charles Schwab, etc.


Involvement: High

When we say DIY we mean implementing common investing principles on your own and having complete control of how/when you buy/sell assets. This makes is a high involvement process, since you as an investor need to build your portfolio.


Cost: Low

The main costs you'll face are commission brokerage charges on ETFs and the OER (expense ratio) for the assets you choose to invest in.


Process:

Once you open up an account on a brokerage and determine your target portfolio allocation (most will have tools to help you with this) you'll have to make trades to buy/sell assets to reach that allocation and adjust as the market changes.


Hands Off Approach: Investing in a Target Date Fund on a Brokerage*

*Specific to investing for retirement.


Involvement: Low

Target date funds are mutual funds that are set up for different retirement years in increments of 5 years. They are managed by humans and adjust their portfolios from a riskier allocation to a more conservative one as they get closer to the retirement year. Involvement-wise you invest your money into one and set it and forget it.


Cost: Low

Fees associated with target-date funds is the expense ratio.


Process:

Almost all brokerages have their own version of a target-date fund, pick one for your retirement year (if you're 20 this would be 2065), invest in it (put it on auto-pilot to invest regularly) and forget about it


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Disclaimer: The content on Young, Not Broke is for informational and educational purposes only and should not be construed as professional financial advice. Should you need such advice, consult a licensed financial or tax advisor.

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