Robo-investing has grown in popularity over the past few years. In 2020, it was estimated that robo-funds were used to manage a hefty $460 billion, and this figure is almost certain to grow in the future.
But is robo-investing a good thing to do? Or is it better to stick with traditional investing methods? Let’s take a closer look.
What do robo-investors do?
Robo-investors automatically invest your money, for a fee. They work by allocating you a personal portfolio, likely composed of a mix of shares and bonds, based on your attitude to risk.
Your risk attitude is determined by the answers you give to questions posed when you first sign up for an account.
How does robo-investing differ from other investing methods?
Before the introduction of robo-advisors a decade ago, if you wanted to invest, you had to bury your head in company reports to choose stocks and shares yourself. Otherwise, you had to go to a financial professional who could manage a fund for you.
A robo-investor simplifies both of these options in that you don’t have to choose stocks yourself and you also don’t need to meet with a human advisor. Not sure whether a robo-advisor can meet your specific needs? See our article on whether robo-advisors can replace financial advisors.
However, it is worth knowing that some traditional investing giants, such as Hargreaves Lansdown, now give the option of investing into ready-made portfolios via their own platforms. These services are often low-cost and cheaper to use, so don’t automatically assume that a robo-advisor is the best way to automatically invest.
See our list of the best share dealing accounts for more options.
Is it good to use a robo-investor?
While robo-investing may not be the absolute cheapest way to invest, it has a number of plus points.
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1. Fees are transparent
Perhaps the most obvious draw of robo-investing is the fact that the fees are clear. Usually, you’ll pay a percentage of what you invest and that’s it.
Traditional investing methods, on the other hand, are likely to hit you with platform charges as well as fees for buying, selling and transferring your funds. Annual management fees are common too.
2. They’re easy to use
It’s harder to think of an easier way to invest than to use a robo-investor. To invest, you simply download an app, answer some questions so it can allocate you a portfolio, and that’s it! To check your investments, you can log into the app. With traditional investing services, app-based investing is less common.
3. You don’t need any investing knowledge
If you’re new to investing or you lack the will to learn, then robo-investors provide an easy way to invest.
The same can’t be said with traditional investing services, where you really need to learn the types of investments you’re getting involved in.
4. You can often earn cashback
An often-overlooked advantage of robo-advisors is that a number of them offer cashback when you first sign up. This can be a boon if you’re a little uneasy about the value of your investment going down, as the cashback can minimise the risk of you losing out.
See our recent article for more benefits of using a robo-advisor.
Robo investing: What else should I know?
As with all investing, remember that with robo-investing the value of your portfolio can go down as well as up.
While a robo-investor can try to determine your appetite for risk, it’s best not to rely on this 100%. Try to take the time to understand what you’re investing in and manage your return expectations.
On another note, remember that robo-advisors will almost always allow you to open an account within an ISA wrapper so you can invest tax free. To learn more about this, see our Stocks and Shares ISA guide.