• Vidhya S

Investment 101: Getting to know robo-advisors

Hey guys! Welcome back to the investment 101 series. Today, we’ll be exploring the world of robo-advisors.

So let’s dive right in!

What is it?

Robo-advisor is a digital platform that uses algorithms to provide investment advice and services. It’s often in the form of a website or app. Basically, we enter our financial details including income, age, and investment goals into the robo-advisor. Based on these particulars, the robo-advisor generates an investment portfolio best suited for us. The portfolio is likely diversified to include stocks, bonds, and others from our country and overseas.

If you like the portfolio suggested, you can then proceed to set up a direct debit to automatically transfer a certain amount of money monthly to your robo-advisor platform for investment.

What is the minimum investment?

Minimum initial investment can be as low as RM 100.

What are the fees or charges involved?

Fees differ across robo-advisor platforms. However, robo-advisor management fees do tend to be relatively lower compared to that of unit trust or mutual fund.

How do you earn return?

You can earn return through an increase in value of assets in your portfolio. Dividends earned on your investments are likely reinvested for you, but some robo-advisors may give you the option to transfer dividend payouts to your bank account. Robo-advisor platforms usually provide real-time information on the current value of your investment portfolio. Additionally, monthly statements may be issued for you to check out returns earned over the month and fees incurred.


What are the main risks involved?

Investments chosen by the algorithm may not perform well leading to loss. If your portfolio contains overseas investments, there is also exchange rate risk. In other words, fluctuations in the exchange rate can affect your investment returns. For example, if your portfolio includes US equities, then a falling dollar is likely to diminish your returns.


How actively do I need to be involved?

If you set up a direct debit to transfer money monthly for investment, then the robo-advisor basically runs on auto-pilot. Once it receives your funds, it invests them in your portfolio. Plus, robo-advisors tend to do automatic portfolio rebalancing when required. In other words, it sells and buys assets to ensure your portfolio stays on target with your investment goals. But of course, you will need to gauge whether the robo-advisor is earning you the returns you expect and whether to switch to another platform.

Pros

  • Small minimum investment.

  • Gives us a chance to invest in overseas stock markets.

  • Diversification. Robo-advisors create a personalised portfolio just for you consisting of various assets such as stocks and bonds from different countries. Diversified portfolios like this help to reduce risk as we don’t put all our eggs in one basket.

  • Lower fess compared to unit trust or mutual fund.

  • Avoids emotional-based investing. Robo-advisors invest based on facts and figures rather than emotions. As such, it’s unlikely to sell off assets rashly or in a panic.

  • Takes a dollar cost averaging approach. Dollar cost averaging is a concept in finance which basically means instead of a lump sum purchase of assets, you break it down into smaller purchases at regular intervals. For example, instead of investing RM 10,000 in unit trust or mutual fund in one go, you invest RM 1,000 per month. The logic here is this: price fluctuates depending on market conditions and if you buy small amounts at regular intervals, sometimes you’ll buy when the price is low, sometimes you’ll buy when the price is high, and overall it evens out at the end of the day. So with robo-advisors, we can see this approach in action when we opt to transfer money for investment monthly.


Cons

  • Exchange rate risk

  • You don’t get to decide what funds or assets to invest in. The robo-advisor creates a portfolio for you.

Who is it suitable for?

If you don’t have a lot of time to spare for research or handling numerous investments, or if you’re not too confident investing in the stock market on your own, give this a try. Robo-advisors can suggest a suitable plan for your investment goals and through the magic of direct debit, you can invest on auto-pilot even when you’re busy with work and all else that life throws at you. It’s also a great option if you wish to invest in overseas stock markets. As small investors, it may be a little daunting to invest in US equities on our own. Robo-advisors can help to incorporate foreign equities into our portfolio.

***


In Malaysia, there are a few robo-advisors to consider, namely StashAway, MyTheo and Wahed Invest. Personally, I’ve been using StashAway for the last 6 months or so. The app offers a number of investment goals to choose from. I opted for ‘Retirement’ and since the investment period is relatively long, StashAway suggested a portfolio that consists primarily of equities. The cool thing here is the app invests heavily in US equities, for which I would feel rather lost and overwhelmed navigating on my own.

I set up a direct debit order and I feel rather comforted knowing that at least part of my investments are running on auto-pilot. Having said this, I do check the app from time to time to see how my investment portfolio is performing and so far so good!

If you’re interested in robo-advisors and wish to learn more about your options, check out these resources:

  1. How do robo-advisors work

  2. Comparison of robo-advisors in Malaysia

  3. Comparison of robo-advisors in India

Hope this helps and I’ll see you next month with another exciting investment option!

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