Sunday, January 18, 2015

All About Automated Investing (aka Now We Can All Have A Great Investment Portfolio Without Paying A Premium)

One hot topic that's been circling the internet over the last few months has been automated investment tools, also known as robo-advisors (among other things). In this article I will explain what these tools do, go over the pros and cons, and show you how to get started using the best tools in this space. See my links at the bottom of the article to setup accounts at top companies in this space with benefits like 30 days free and skipping to the front of the line.

The intention of these tools is to take all the pain out of investing yourself. Many people like going this route because they offer lower fees and less hassle when compared to traditional brokers and investment advisors.

Lower Fees

Universally, the online automated investment advisors offer surprisingly low expense ratios. They are hard to beat if you were to invest elsewhere or have a real person as your advisor. For the service they provide (see "less hassle" below) I feel they are well worth the small expense. This is a personal decision, however, and I urge you to decide for yourself.

There are also no transaction fees. At popular online brokerages (eTrade, Scottrade, Fidelity) this cost ranges from $7 to $14 every time you buy or sell: it doesn't matter if you're buying one share or twenty. If you invest only $100 you're already starting off at a 7% loss. At best. This is when automated investment companies really shine. If you can only afford to invest $100 or so a month automated investing becomes a fantastic option. The only thing I would recommend to someone saving for retirement over this is Vanguard. I will be writing up a post on them in the future.

Less Hassle

Since everything's online the majority of these companies have great websites. Betterment has arguably the best website of the bunch, here's a peak:

The websites have loads of features and information available at any time. The ability to check up on the account whenever you want is fantastic. But I'll warn you, it can get addicting.

Once you take literally seconds to setup automatic deposits, you will never have to set it again. I can't tell you how much less stressful my finances are now that I've automated it all.

Another great feature is automatic rebalancing and dividend reinvestment. Funds don't all grow at the same rate (surprise!) when this happens, the investment weights get skewed towards the funds preforming super well or super poorly. The companies will automatically shuffle your money around to make sure you stay as close as possible to your original allocation. Whenever you receive a dividend, it will be automatically put back into your account. There is almost nothing you have to do to maintain your account after the initial setup.

If you've decided to open an account with one of the automatic investment companies out there, congratulations! If you're still on the fence, this next section will hopefully help you decide.

Here are the steps to opening an account and setting it up so you never have to look at it again.
  1. Open an account with one of these companies (See bottom of the article for discounts)
  2. Fund your new account
  3. Choose your risk level
  4. Sit back and watch it grow

Step 1: Open An Account

When you open an account with one of these companies you will give them your basic information and link a bank account to their site. The account opening process takes 10-15 minutes at the most. Not a lot for something that can save you time worrying about investments and make you money in the background.

You can select from a variety of plans. The type of account options available at some (but not all) of the companies are: Traditional IRA, Roth IRA, Taxable Investment Account (this is the regular vehicle), and Trusts.

Step 2: Fund Your New Account

This allows you to deposit money to get your account funded so you can start earning interest! Once your account's initial setup is complete you will have to do is determine your ratio of stocks and bonds. This is the hardest part and it takes 10 or 15 minutes... so that should say something. Deposit as much as you are willing, and setup automated deposits to make contributions a breeze.

Step 3: Choose Your Risk Level

After you have setup and funded your account, you will have to take your last step: choosing your acceptable level of risk. This is mostly determined by ratio of stocks to bonds you hold in your account. Very simply, stocks are riskier while bonds are safer. For more information about the differences between the two, see my upcoming article "What's the Difference Between Stocks and Bonds?"

Very simply put, the advice for the average investor is that they should have anywhere between their age in bonds to their age minus 20 in bonds. For example, an 30 year old investor would have a portfolio that has between 30% bonds (their age) to 10% (30 - 20) bonds, with the remainder in stocks. The exact percentage is determined by numerous factors such as job security, risk tolerance, all available assets, and others.

For more information, see my upcoming article "What is the right stock and bond allocation for me?"

My retirement accounts hold around 90% stocks and 10% bonds, which is the allocation recommended again and again for people under 30. My emergency fund, on the other hand, is 61% stocks and 39% bonds. I want it to be less risky because I may need to use the cash. It all depends on what you're using the account for and how much risk you're willing to take on.

This is by no means final, and a huge part of personal finance is that your investment ratios are your choice. If you aren't comfortable taking on more risk (stocks), you can always hold more bonds. One of the wonderful things about accounts like Betterment is that you can change your allocation whenever you want. It is better to get started with a conservative profile than to not start at all. Be careful though: When you change your allocations the company sells your shares and buys new ones to meet the new allocation, which can incur taxes.

Step 4: Sit Back and Watch it Grow

At this point, you have already:
  • Opened an account with one of the online automated investment companies
  • Funded your account
  • Potentially setup automatic deposits
  • Set your stock/bond allocations
You might be asking yourself, "What do I have left to do?" Well, nothing! That's the best part about this technology. After you setup everything you can sit back, relax, and let your money work for you. You can relax knowing that money is automatically invested in a well diversified portfolio of stocks and bonds. They will also automatically reinvest your dividends and automatically rebalance your funds if they move too far away from your predetermined allocation.

If you want, you can use the company's smartphone app or website to keep track of your investments. But don't do it! It's addicting, and small drops in the market will drive you crazy. Remember to stay the course. Leave the money you put in your account in there unless you really need it. For more info, see my upcoming article "Why you shouldn't be afraid of the stock market"

Another one of the great benefits of these automated investing tools is the low fees. As an example, Betterment (one of the more established companies in this space) has expense ratios ranging from .35% to .15%. Most advisors charge at least twice that. It should be noted that the expense ratios are on top of the underlying fund's investment ratios. WiseBanyan, a relatively new company on the scene, has no additional fees! The website isn't as slick as Betterment's, but the lack of fees is a huge benefit that shouldn't be overlooked.

More on the impact of expense ratios can be found in my upcoming article on expense ratios.

So what are you waiting for? It takes minutes to setup and once you do, your money is working for you! You can open accounts with each company without penalty, click around and see which you like best. There's no commitment if you're just opening an account without funding, which is amazing. That's what I did.

Betterment is one of the first automated investors to hit the scene. They are also, in my opinion, the one with the best web interface. Their site has great graphs and descriptions of everything you'd have questions about. Plus if you sign up using my link, you get 30 days free! (If you decide to invest with them) Sign up for Betterment now!

For a more detail about what you can expect when you open an account with Betterment, see my article "What's the Deal With Betterment?"

As I mentioned earlier, WiseBanyan is one of the newer automated investment services out there. Because of this their website isn't up to the same level as Betterment's. But don't let the the user interface fool you! As I mentioned above, WiseBanyan is the only service I know that charges no additional fees to manage your money. For this reason, and this reason alone, I think WiseBanyan could rocket up to the top of this category.

WiseBanyan registrations are usually on a "first come, first served" basis. Due to the overwhelming interest in their relatively new site, there are currently thousands of people waiting in line for an account. But, if you use my link you can skip the line!

Sign up for an account with WiseBanyan today, skip the line, and pay no fee! Sign up here

I will be doing an in-depth review of these two sites over the course of the coming weeks!

Did I miss anything? Is there something you'd like me to go into more detail on? Let me know in the comments below!

I am not being paid by either Betterment or WiseBanyan to write this review. I'm just a satisfied customer.

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