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A Beginner’s Guide for New Investors


A Beginner’s Guide for New Investors

I’ve heard of RoboCop. He’s been in a bunch of movies.

I’ve heard of robocalls. That’s when telemarketers or politicians call your number with annoying recorded messages.

I’ve even heard of “Robopocalypse,” a popular sci-fi novel — mainly because Steven Spielberg almost made a movie out of it.

But I had never heard of robo-advisers.

What the heck are robo-advisers? And can I trust them with my money?

I’m not alone here. Less than one in four millennials use robo-advisers to manage and invest their money, according to a recent LendEDU survey. Of those who don’t use them, 62% said it’s because they’ve never heard of a robo-adviser.

But if you haven’t heard of them yet, you will. Because they’re growing more popular by the year.

Robo-Investing 101: What You Need to Know

Consider this a beginner’s guide.

Robo-advisers (or robo-investors, if you prefer) are apps that automate your savings and investments. These online financial companies use sophisticated software instead of human stockbrokers to manage your money. That way, they keep fees low.

They’ve actually existed for nearly a decade.

Launched in 2008, Betterment is considered the pioneer of robo-investing. Its main competitor, Wealthfront, moved into robo-investing in 2011.

The two companies are competing fiercely for market share. Betterment is based in New York, Wealthfront in Silicon Valley.

They have the same basic business model, designed for long-term investors who want a professionally managed portfolio at a low price. Here’s our primer on how the two apps are different.

Each company’s website asks you about your age, when you hope to retire, and your tolerance for risk.

Both companies use software robots — proprietary programs that act as automated advisers — to steer your investments and cheaply do things that stockbrokers and money managers would charge you higher fees to do.

Our Favorite Robo-Advisers

Robo-advisors have come a long way in a decade. Today there are more than 100 of them.

Here are some of our favorites:

  • Blooom: This robo-adviser helps optimize and manage your 401(k). Cost: $10/month, but you can get a free account checkup before signing up.
  • Betterment: Considered the pioneer of robo-investing, this app invests your money into a portfolio of low-cost index funds. You can start with a minimum $100. Cost: 0.25%/year
  • Acorns: This app connects to your debit and credit cards and automatically rounds up your purchases, investing the spare digital change in a simple portfolio based on your risk tolerance. You can use the account to automate your savings and withdraw anytime. Cost: $1 + 0.5%/month (no fee for a zero-balance account)
  • Stash: Choose a portfolio based on your beliefs and interests. It’ll pull an amount you set from your bank account at regular intervals, and you can start with as little as $5. Plus, you’ll get a $5 bonus when you sign up through this link with the code PENNYH. Cost: $1/month (first month free)
  • Clink: This app lets you invest a set amount per day, week or month — a minimum of $1 a day — automatically drawn from your bank account. Cost: $1/month (plus a $5 signup bonus)

Pros and Cons

Can you trust them?

Well, these companies have a pretty straightforward business plan. They simply funnel your investment money into a portfolio of low-cost index funds that track the stock market as a whole.

It’s not brain surgery. Their actual investment strategy isn’t revolutionary or avant-garde or anything. Their trick is, they make it easy and cheap for you to invest. And a portfolio of low-cost index funds gives you an 80% to 90% chance of outperforming anything else.

It’s working. Betterment is now managing $9.5 billion in assets. Wealthfront is managing $5 billion.

Let’s talk pros and cons. Is there a downside?

Sure. It’s not the same as having a full-service financial planner. Ideally, a real, live human financial adviser gets to know you personally and uses every tool available to help you meet your goals.

The upside?

It’s cheap. You’re getting expert help instead of doing it all yourself. You have a professionally managed investment portfolio at a rock-bottom price.

It just happens to be a robot.

Mike Brassfield ([email protected]) is a senior writer at Codetic. He likes RoboCop but thinks the first movie was better than the sequels.

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