Many Australians are keen to invest and grow personal wealth. But uncertainty about where to invest, how to invest and how to manage investments over time can be key stumbling blocks.
That’s where automated investing is a game-changer. It provides an easy and affordable way to grow a diversified portfolio.
This Automated Investing Guide explains how it all works, what to watch for, and why so many Australians are using technology to drive their wealth.
What you’ll find in this Guide:
- What Is Automated Investing?
- How Does Automated Investing Work?
- Automated Investing vs. Robo Advisors
- Automated Investing Pros & Cons
- Tips for Choosing an Automated Investment Platform
- Automated Investment – the Bottom Line
What Is Automated Investing?
Automated investing, also known as robo advice, allows investors to spread their money across a portfolio of investments selected by sophisticated computer algorithms.
The portfolio recommended to you is based on details you provide about yourself – your age, how you feel about risk, and your personal goals.
From there, automated investing does all the hard yards on your behalf, continually rebalancing your portfolio so that it always reflects your aims, no matter what’s happening in investment markets.
How Does Automated Investing Work?
To get a better idea of how automated investing works, let’s break the process down into steps. While these steps may differ slightly between robo advisors, the general principles are much the same.
Step 1: Portfolio selection
Some robo advisors will start the ball rolling by asking you to fill in an online questionnaire. The information you provide will form the basis of the portfolio recommended to you. Other robo advisors allow you to choose your preferred portfolio.
In both cases, the portfolio is made up of a blend of carefully selected investments. This way, you have a readymade basket of investments that gives you valuable diversification from day one.
Step 2: Initial investment
If you are comfortable with the portfolio the automated investment service suggests, you simply open an account, deposit your initial capital, and presto – you’re an investor!
From there you can select a variety of ways to grow your investment. Options can include setting up automatic direct debits to regularly add to your portfolio, or you may choose to invest a little more when you have the funds available.
Step 3: Automatic rebalancing
One of the most exciting aspects of automated investing is that your portfolio is automatically rebalanced on your behalf.
Rebalancing can be a complex process, and one often neglected by investors. But rebalancing is a critical aspect of portfolio management. It ensures your investments always reflect what matters to you – your goals and tolerance for risk.
Automated Investing vs. Robo Advisors
If you’re wondering which is better – automated investing versus robo advisors, there’s not much in it. They’re pretty much the same thing, only the name is different.
In fact, the terms automated investing and robo advice are often used interchangeably.
The main point is that both are backed by advanced technology to recommend an investment portfolio based on your needs, and then automatically manage it efficiently – and at very low cost – letting you put wealth-building on auto-pilot.
Automated Investing Pros and Cons
Automated investment has the potential to reshape the way you invest. But it may not be for everyone. Weighing up the pros and cons can help you decide if automated investing is a good choice for you.
Automated Investing Pros
Here are some of the advantages of automated investing:
- Low Cost Process
Automated investing has rapidly gained a loyal following. One of the main drivers for this is the low costs involved. And that means more of your money goes towards your portfolio instead of your advisor.
According to Finder, robo advisors charge an average fee of 0.3% p.a. for an investment of $10,000. Including other investment fees, this means total fees are likely to be around 0.4%-0.5% p.a.
By comparison, Adviser Ratings says the average cost of face-to-face financial advice in 2021 was $4,000, and 93% of traditional advisors plan to increase their fees in 2023.
- More Affordable Initial Investment
Not much capital to invest? Not a problem. Some automated investing platforms let you get started with as little as $5. That’s probably less than the cost of your morning latte.
This is what experts mean when they say robo advice has ‘democratised investing’. No matter how much, or how little, capital you have to invest, automated investing lets you grow a portfolio efficiently and at very low cost.
- Efficient and Convenient Access
Automated investing can be a one-stop investing shop. There’s no need for lengthy meetings, no need to schedule phone calls.
You can start investing when you’re ready, then add to your portfolio at any time. Better still, you can track the progress of your portfolio any time you have access to WIFI.
Automated Investing Cons
No system suits everyone. Here are potential drawbacks of automated investing.
- Limited Access to Human Advisors
As the name suggests, automated investing focuses on helping you invest in a readymade portfolio. Most automated investing platforms do provide access to a human point of contact. But if you need tailored advice on issues such as estate planning, insurance or complex tax advice, automated investing won’t offer the solution you’re looking for.
- Narrow Investment Choices
As the number of automated investing platforms grows, there is a wider choice of underlying investments to choose from. While many robo advisers focus on portfolios made up of exchange traded funds, other options include bonds, gold and even Bitcoin.
However, some investment classes such as residential property are not covered by automated investing.
- Limited Flexibility
The portfolios constructed through automated investing can be inflexible as they don’t allow you to capitalise on views you may hold about when to buy or sell a particular asset. This drawback can be overcome by using automated investing for the core of your wealth creation, while also dabbling in other directly held investments that allow you to pursue individual strategies.
Tips for Choosing an Automated Investment Platform
Four main considerations can help you decide the automated investing platform you feel most comfortable with.
- Automated Investing Fees
The less you pay in fees, the more you have invested. So it’s a good idea to research the fees applicable to the sum you plan to invest across a variety of automated investing platforms.
Bear in mind, in many cases, the more you have invested, the lower the fees you pay. So it can help to look ahead if you have plans to steadily grow your account balance.
There is an automated investing platform to suit all budgets. If you don’t have sufficient upfront capital to get started with one robo adviser, there is sure to be another that suits your budget.
A number of automated investing platforms allow you to grow an account balance from scratch, and only start investing when you have reached the minimum capital required.
- Investment Options
While many automated investing platforms have exchange traded funds at the core of their portfolios, there is tremendous variety in the range of investment options available.
Most robo advisers offer sustainable investment options, others offer exposure to cryptocurrencies. Bear in mind, your choice of investments should ideally match your goals, preferred investment timeframe and how you feel about risk.
- Investor-friendly extras
Each robo advice service brings something unique to the market.
You may be keen on extras such as round-ups that automatically send the small change on purchase to your robo advice portfolio. Or you could be looking for newsletters and webinars that keep you up to date on the changing dynamics of investment markets.
What matters is that you are able to gain additional value from the automated investing fees you pay.
Automated Investing – the bottom line
If you want to start growing your wealth through shares and other investments, or if you are aiming for a particular goal, such as saving for your child’s education, automated investing can help you get there.
And it’s not an option limited to individual investors. Robo advice is also being embraced by self-managed super funds in Australia.
As a low cost, low-stress and effortless way to invest, automated investing appeals to a wide variety of Australians.
Is automated investing right for you? One way to know is to check out some of the best robo advisors in Australia to discover the platform that ticks all the boxes for your goals and circumstances.