3 reasons why investing with a robo-adviser could help your money survive the market's darkest days
- Robo-advisers are hugely popular with young investors, in part because they provide exposure to the stock market without requiring much time or effort.
- In times of immense market volatility like we're seeing now due to the COVID-19 pandemic, these investing algorithms help investors stay the course.
- Automated investment platforms offer discipline, automatic rebalancing, and a barrier between our impulses and investments.
- See Business Insider's picks for the best robo-advisers and investment apps »
It's difficult during times of intense market turmoil to uncouple our emotions from our investments. The common impulse is to cut your losses and stop investing, but it's rarely the solution.
"One of the most important things to do as investors is to get invested in a way that's appropriate with your longer-term goals and risk profile. Ignore the short-term market noise and stay in that," David Koenig, CFA and chief investment strategist for Schwab Intelligent Portfolios, told Business Insider.
One of the best ways to maintain that hands-off strategy, according to Koenig, is to invest through a robo-adviser. Note that Schwab Intelligent Portfolios, an automated investment platform, is a robo-adviser itself.
Robo-advisers are generally cheaper than human advisers and simple to use. They're driven by algorithms to design a personal, diversified investment portfolio based on the information you provide about your risk tolerance, goals, and time horizon.
Here's are three reasons why Koenig says a robo-adviser can be a great tool for weathering economic volatility.
1. Rebalance your portfolio automatically
Allocating your money across, and within, stocks and bonds is the best way to control the amount of risk you take on as you invest. But as the markets move, the percentage of your total portfolio that's allocated to certain bonds or stocks will naturally change along with it. Most robo-advisers offer automatic rebalancing to return your portfolio to its original allocation.
"The rebalancing process is a process designed to monitor a client's portfolio and look at how much their portfolio has changed over time," Koenig explained. "So if a client started out with a 60/40 portfolio - 60% stocks, 40% bonds at the highest level - over time as the markets are fluctuating, those allocations are going to change how much is in each of those asset classes."
Rebalancing "helps keep the allocation consistent," Koenig said, and sets investors up to profit when the markets recover.
"We don't know when the bottom will be reached, whether that will be this week or next week or next month or when," he said. "Missing out on those early stages of recovery can be very detrimental to a client's long-term performance, and ultimately, ability to achieve their goals. Staying invested and keeping the portfolio allocation consistent through rebalancing helps give the client the ability to benefit when markets do recover."
2. Help you stay disciplined
Successful investing relies on discipline. That's why the oft-repeated maxim, "Time in the market is more important than timing the market," is one of Schwab's core investing principles, Koenig said.
"Markets have been up and down on consecutive days - plus or minus 10% on consecutive days - so that obviously creates a great deal of anxiety among investors," Koenig said. "Robo-advice platforms help to provide that needed discipline. It needs to be [disciplined] in these types of volatile times."
America's last big financial crisis is a prime example of how staying disciplined - investing consistently through the good days and the bad - is crucial.
"If we look back to the 2008/2009 financial crisis, for example, and we look at March of 2009, that certainly wasn't a period where there was a lot of confidence in the markets," Koenig said. "However, if you look just three months after the market bottomed on March 9, 2009, US equity markets were up 40% in that three-month period."
In other words, it pays to stay invested from the lowest lows to the highest highs, but no one can predict when that will happen.
3. Provide a barrier between impulses and investments
Most of us invest with specific goals in mind, whether that's to retire comfortably, pay for a child's college education, or simply build wealth.
As we watch the markets rise and fall, it's tempting to act on emotions and make adjustments to our investments without thinking strategically or even rationally. But if your goals haven't changed, your investment strategy probably shouldn't either. According to Koenig, robo-advisers help create a necessary barrier between our impulses and our investments.
"That's what a robo-adviser platform is designed to do automatically - to take that emotion out of the market when markets are going up, preventing clients from becoming overconfident and overly aggressive ... and likewise when markets are falling, keeping clients' portfolios consistent so that they can benefit when markets recover," he said.