Robo Advisors: A Complete Guide to Automated Stock Picking

What are robo advisors and how do they work?

Robo advisors are online platforms that use algorithms and artificial intelligence (AI) to create and manage your investment portfolio. They can help you pick stocks that match your goals, risk tolerance, and preferences, without requiring much effort or expertise from you.

Robo advisors typically work in the following steps:

• You sign up for an account on the robo advisor’s website or app and answer some questions about your financial situation, goals, and preferences. These questions may include your age, income, net worth, risk tolerance, time horizon, and investment objectives.
• Based on your answers, the robo advisor uses an algorithm to create a personalized portfolio of stocks that matches your profile. The portfolio may consist of low-cost exchange-traded funds (ETFs) that track various market indices, such as the S&P 500, the Nasdaq, or the Dow Jones. Some robo advisors may also offer other types of stocks, such as individual stocks, thematic stocks, or socially responsible stocks.
• The robo advisor automatically invests your money in the portfolio and adjusts it over time to keep it aligned with your goals and risk level. This may involve rebalancing the portfolio periodically, tax-loss harvesting to reduce your tax liability, or changing the stock allocation based on market conditions or your life events.
• You can monitor your portfolio’s performance, access financial planning tools, and contact customer support through the robo advisor’s website or app. Some robo advisors may also offer access to human financial advisors for additional guidance or questions.

What are the benefits of robo advisors for stock picking?

Robo advisors offer several advantages over traditional human advisors or DIY investing for stock picking, such as:

• Lower costs: Robo advisors charge lower fees than human advisors for portfolio management and advice. The average annual fee for robo advisors is around 0.25% of your account balance, compared to 1% or more for human advisors¹. Robo advisors also use low-cost ETFs or stocks that have minimal expense ratios or commissions, which can save you money in the long run.
• Convenience: Robo advisors are easy to use and require minimal effort from you. You can set up an account, fund it, and start investing in minutes, without having to meet with a human advisor or do extensive research. You can also access your account anytime, anywhere, through your computer or smartphone.
• Automation: Robo advisors take care of the tedious and complex aspects of stock picking, such as portfolio construction, rebalancing, tax optimization, and risk management. You don’t have to worry about making decisions, timing the market, or keeping track of your stocks. You can simply sit back and let the robo advisor do the work for you.
• Personalization: Robo advisors tailor your stock portfolio to your specific needs and preferences, based on the information you provide. You can also adjust your portfolio settings, such as your risk level, investment goal, or time horizon, at any time. Some robo advisors may also offer customized portfolios for specific purposes, such as retirement, college savings, or charitable giving.

What are the drawbacks of robo advisors for stock picking?

Robo advisors are not perfect, and they may have some limitations or disadvantages for stock picking, such as:

• Limited human interaction: Robo advisors rely mostly on algorithms and data to make stock picking decisions, which may not suit everyone’s style or comfort level. Some people may prefer to have more human input, feedback, or emotional support when it comes to their stocks. While some robo advisors may offer access to human advisors, they may charge extra fees or have higher account minimums for this service.
• Limited customization: Robo advisors offer a limited range of stock options, usually restricted to ETFs or stocks that track broad market indices or themes. This may not satisfy some investors who want more control, diversity, or flexibility in their stock portfolio. For example, some investors may want to invest in individual stocks, niche sectors, or alternative assets, such as gold, real estate, or art. Some investors may also have specific ethical, religious, or environmental preferences that are not reflected in the robo advisor’s portfolio.
• Limited scope: Robo advisors focus mainly on portfolio management and stock picking advice, which may not cover all aspects of your financial life. For example, some robo advisors may not offer comprehensive financial planning, such as budgeting, debt management, insurance, estate planning, or retirement income strategies. Some robo advisors may also not account for your other assets or liabilities, such as your home, business, or student loans, when creating your portfolio.

 

Are robo advisors right for you for stock picking?

Robo advisors are a great option for investors who want a low-cost, convenient, and automated way to pick stocks. They are especially suitable for beginners, busy professionals, or people who have simple financial situations or goals.

However, robo advisors may not be the best choice for investors who want more human interaction, customization, or scope in their financial services. They may also not be ideal for investors who have complex financial needs, high net worth, or specific stock preferences.

Ultimately, the decision to use a robo advisor for stock picking depends on your personal circumstances, preferences, and objectives. You should weigh the pros and cons of robo advisors and compare them with other options, such as human advisors, online brokers, or DIY investing. You should also do your research and choose a reputable, trustworthy, and regulated robo advisor that meets your expectations and standards.

 

Important Note: This content is intended for educational purposes only and should not be interpreted as financial advice. Always consult with a qualified financial advisor before making any investment decisions.