Creating an investment portfolio can be confusing for even the more seasoned investor, but someone just starting out may want the easiest path of all. One option: an automated investment platform, known as a “robo-adviser.”
Retirement Tip of the Week: If you’re new to investing and not sure where to start, consider a simple platform like a robo-adviser to build your portfolio. You can always take a more active approach later.
Robo-advisers have grown in popularity over the last decade, and they’re one way to save for retirement and other big financial goals.
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These services, some of which offered through major investment firms, allow individuals to invest for a goal after plugging in a few variables, including how much they want to save, how much they plan to contribute, the duration for saving and their risk tolerance (often determined by answering a risk questionnaire).
The algorithms behind these platforms take all of that into consideration and come up with an asset allocation that helps individuals meet their goals, or tells them how likely those goals will be reached with the contributions and risk selected. They show the breakdown of the asset allocation, but also provide investors with the details of the holdings, such as what type of exchange-traded funds and inflation-protected bonds were chosen in the wide mix of investment options.
Many of these companies also allow individuals to invest in a traditional or Roth IRA, not just a taxable investment account.
It is a very hands-off approach – as in, investors aren’t picking the type of stock or bond they have in their portfolios – but it is often an easy, less stressful approach to investing. Investors can adjust their risk preference for the portfolio however, such as if they feel the algorithm suggested one too conservative or risky.
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Vanguard, Schwab, Fidelity and Merrill all have their own versions of these automated services. There are independent firms as well that offer these services, such as Betterment and Wealthfront. Robo-advisers are expected to expand in a few ways next year, including offering more value-based investment strategies and comprehensive personal financial planning.
These services aren’t for everyone. People who want more control over their investments, for example, might want to open an account at an investment firm or brokerage company of their own, so that they can select their funds after doing some research. They may also want to consider working with a financial adviser, who could help them create an investment portfolio, taking into account important factors and talking through concerns about market volatility.
Beginner investors may also consider a target date fund, which is tied to an estimated retirement year and automatically adjusts its asset allocation to become more conservative as the years go on.
But for those looking for a simple strategy as they become more comfortable with investing, robo-advisers are a start – and a way to build wealth as they get more acclimated to the investing world.