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Millennials have often been the topic of conversation (and the butt of many jokes) for a couple of years now: we’re apparently all about avocado toast and eco-friendliness, but we don’t seem to like investing. Well, that last one may actually be true; a recent survey conducted by Ally Invest found that 66% of millennials are intimidated by the stock market. Considering many of us grew up in the middle of the 2008 Financial Crisis, it’s not hard to understand why.
In spite of this, the advancement of financial technology has brought about a simple way to start confidently investing in the stock market without knowing anything about dividends, capital gains, or net asset value (whatever that is).
Robo-advisor is the name given to certain web or app-based services that employ algorithms to create and manage investment portfolios without the need for a human financial advisor. Anyone can use a robo-advisor–no matter your previous experience with fintech or investment–but there are a few reasons why robo-advisors are particularly ideal for millennial and Gen Z users.
Taking Advantage of Advanced Technology
As one article put it, robo-advisors “are good entry-level tools for people with small accounts and limited investment experience–namely, Millennials.” We grew up during the dot-com boom, so the use of technology in business comes second nature to us. Heck, I’d even go as far as to say some of us actually prefer interacting with a robot than a human being. Can you really blame them?
Skeptics might ask whether an algorithm is as good as an expert investment professional. But as it turns out, stockbrokers have long since been using computer-based algorithms to dole out investment advice since the early 2000s. However, this is the first generation of robo-advisors with algorithms that are available to the general public–not just financial advisors.
Now, this technology makes investing from home easier than ever. Instead of hitting up your financial advisor to perform a trade, you can just visit the website or open the app on your smartphone and make all the changes you want in just a couple of taps. What’s more, you can link your bank and investment accounts together to easily cash out your earnings or put more money in your portfolio. Robo-advisors are just one more way technology can make our lives easier (provided we understand and use them accordingly).
Pay Less for Growing your Savings
Whatever you save in the process of growing your savings will mean more money for your future. It may not seem like a significant amount now, but people generally invest for the future–not the present. This is why keeping an eye on fees is important. Human advisors usually charge an annual management fee of between 1% and 2% (and sometimes even more) on the balance of your account. Meanwhile, robo-advisors generally charge between 0.2% and 0.5%.
So let’s say a company charges you 0.5% on your balance to manage your investments. Maybe you just have $1,000 in your account to start with, but it grows and compounds at 3.5% per year. On opening the account, you’ll pay just $5.00. But after one year, you’ll pay $5.18. And then $5.35 the next year. By the time you’ve had those initial thousand bucks invested for ten years, you’ll have paid a total of $65.69 to get advice from an algorithm on managing a $1,000 investment. If the company charges you a 2% management fee, you will have paid over $200 at the end of the same 10 year period.
Saving for Retirement and Other Big Expenses
While most of us aren’t thinking about retiring yet, retirement age is actually increasing. Many of our grandparents were able to retire at 55; now it seems the trend is to retire at 63 and is expected to keep increasing. Regardless of when you plan (or hope) to retire, though, your best bet at financial stability will always be saving whatever money you can. The sooner you start, the less painful everything will be. Devoting $100 a week for retirement may sting if you’re just starting out, but it will be easier than trying to contribute $500 a week when you’re in your late forties.
Rely on Nobel Prize-Winning Economic Theory
Basically, robo-advisors work by using a series of fancy algorithms to build your portfolio and determine when to buy and sell. There are different ways to create these algorithms, but most robo-advisors just use a method called Modern Portfolio Theory, or MPT. This theory was developed by economist Harry Markowitz in the 1950s, who was later awarded the Nobel Prize in Economics for his work in the 1990s–including the creation of MPT.
Before MPT, financial advisors would look at each individual asset and determine how risky it was. Modern Portfolio Theory is innovative in the way it looks at the entirety of the portfolio to determine how much risk (losses) and return (earnings) are involved with a particular investment. MPT takes a holistic view of the financial assets and analyzes how any given investment would affect the portfolio as a whole.
Robo-advisors take this one step further by automating the analysis. Human error is no longer a concern, as are conflicts of interest. The combination of all these factors result in a service that is (usually) reliable and efficient, as well as being less costly to investors.
If you want to compare robo-advisors or just check to see if the one you’re considering is legit, you can search FINRA’s BrokerCheck and the SEC’s EDGAR database. There, you can find information about the states in which the firm is licensed to operate and any past regulatory actions.
Small Steps Towards a Brighter Future
We know, the world is literally on fire right now. Investing isn’t going to solve all our immediate problems, but saving whatever we can will always be a good idea. Robo-advisors are a great option for affordable, trustworthy, and efficient long-term investing. If you ever consider diving in, check out our Top Ten Robo-Advisors research guide and see if you’d like to give one a try!