Should you go to Robo-advisors if you just want to invest in ETFs and unit trusts?

Robo-advisors.

Many of you might be familiar with some of these platforms nowadays.

✔️ Low cost investing.

✔️ Convenient to start.

These are some of the commonly advertised benefits of using robo-advisors.

In fact, robos themselves may be marketing these benefits to convince you to use them.

“Fighting for fairer, lower fees.”

“Gain $600,000 from paying less in fees!”

"Don't let fund manager fees erode your investment returns!"

You might have seen these marketing techniques encouraging you to use robos’ platforms to start investing.

But do low fees translate to being able to generate the returns you are looking for?

When the market is stable, using a robo-advisor to manage your investments at low cost might work for some people, especially if you are just looking to do dollar-cost averaging (invest a small fixed sum every month) in the long run.

But what if the market crashes?

How much will the robo advise you on what you can do to capitalise on market changes?

Will robos advise you to continue to stay invested or make changes to your portfolio?

Using robos is a good way to kickstart your investment journey, but can we use them to achieve our retirement goals?

Read on to find out.

At The Money Folks, we help our clients invest and build multiple income streams that potentially enable them to retire with more than $1 million. Reach out to us for a financial assessment call (by application approval only).

Disclaimer: This post represents our personal views and opinions and is neither associated with any organisation nor reflect the position of any organisation. This content is also only for informative purposes and should not be construed as financial advice. Past performance does not necessarily equate to future performance. Please seek advice from a Financial Adviser Representative before making any investment decisions.

Does low-cost investing provide an investment strategy tailored to your specific risk appetite?

Have you ever wondered why the fees for robos are so low?

Are lower fees always better?

It is because investment decisions and management are automated based on their algorithms.

Although robo-advisors can assess your profile through their profiling questionnaires, they may not know you well as a person. The questions are usually generalised to capture typical investment profiles.

For illustration only. Please refer to the disclaimers at the end of this article.

Can investment strategies really be categorised into general baskets to match each user’s goals and risk appetite?

One thing about investment strategies is, that it is never the same for everyone.

Our lifetime goals can't be determined by a set of questions and answers. And all of us have our own nuanced differences as well as financial needs.

On top of that, this Artificial Intelligence (AI) tool may not be able to assess your current financial health. Without your current situation in mind, the investments done may not be strategised to be suitable for your current financial state.

You may find some robo-advisors not designed to provide customised solutions to your financial needs, for instance, retirement planning, tax management and many more.

You may want to reflect, why are you investing or considering investing?

For many people, their main motivation for investing is to earn more money, especially passive income, for their retirement or specific financial goals.

Ultimately it also boils down to your own preference whether you prefer a generalised approach to investment or a more tailored strategy for your needs.

Is dollar-cost averaging with robos the best strategy for you?

Dollar-cost averaging (DCA) is a great investment strategy. It is the practice of investing the same amount of money into certain assets at regular intervals over the long term.

DCA generally works to your advantage when prices are going down.

For example, if you are investing in a unit trust and you practise DCA every month, if prices go down for a period of time, you will be able to capture lower prices in the market. Hence, you will be able to have more units with the same amount invested.

This spreads out your cost per unit invested.

But there is a point to highlight about DCA — is it still a good strategy when prices are going up? And what do you do if prices keep rising?

Typically, a continuous increase in price may result in an overvaluation of the asset. And overvalued assets may crash and eventually enter price correction.

For illustration purposes only. Please refer to the disclaimers at the end of the article.

In the event of a crash, there’s a risk that the asset’s valuation might stagnate. Worse, it might never recover to the price you paid.

Will you keep on DCA-ing in this situation?

This is why understanding the valuation of a financial asset is important. This way, you may optimise your investments towards value instead of investing within fixed intervals without taking into consideration whether the security is under or overvalued.

There is another way of looking at things – using the Dollar Value Averaging strategy in your investments. It is the act of buying more of an asset when prices are lower and buying less of an asset when prices are higher.

By always being alert to the valuations, you will be able to capitalise on temporary price corrections as well as protect yourself from losing more money than you can stomach.

We will never be able to predict how the market behaves but at least when the situation arises, we can respond to it accordingly rather than investing blindly.

Is your investment strategy optimised for value?

Whenever you invest through anything — be it DIY, through robo-advisors or with financial advisor representatives (FARs) — you need to consider the price, the value of an asset, as well as your profit. If you invest without taking into account the price and value of your investment, you might not be able to beat the market.

A good FAR will be able to help you with dollar value averaging as they are constantly in touch with the latest changes in the market and they can help you manage your portfolio actively.

Find out if your investment strategy is optimised through a financial assessment call with us →

How prepared are you for a market downturn if you use robos vs working with financial advisor representatives?

Robo-advisors provide the independence for users to strategise their investments.

Although robos recommend asset allocations for every risk profile and help you diversify in various sectors and geographies, users have the freedom to manage their own risks.

With some robos, you can set how often to rebalance and you may switch your risk profile as you wish.

But is this freedom actually good for your investment, especially if you might not be a skilled investor?

Robos, most of the time, may do mass rebalancing, but as they advocate a passive investing strategy, typically there would not be drastic changes to your portfolio. The general strategy many robos advocate is simply to stay the course and continue to DCA.

But if you plan to manage your asset allocation yourself on the robo platform (which you can do as well with some robos), do you have the knowledge and skills to make sound investment decisions?

As robos are not providing human advisory services per se, they generally would not be able to provide personalised inputs on the current market situation and how it could affect you, specifically.

For example, if you are significantly invested in technology funds in China, the Chinese regulatory crackdown in the technology sector in late 2021 would have caused your portfolio to be in the red.

Source: Finviz.com

Above is an ETF that tracks the Chinese technology sector. Up until the first quarter of 2022, there has been no positive recovery.

A robo-advisor would not be able to specifically recommend you what is the best course of action that you can do based on your financial goals when the market starts to move.

For example, should you commit to your asset allocation and stay true to DCA?

Robos would not be able to walk through personally with you how to potentially deal with the current market. They would usually just provide updates on a general basis to investors, such as through mass emails.

On the other hand, an experienced licensed professional would be able to give you rational advice and insights that can enable you to make sound investment decisions during a market crash.

An experienced and trained Financial Adviser Representative (FAR) that is specialised in investments can guide you through any market conditions.

They would be able to act as voices of reason during turbulent times like this.

If you need any advice, do reach out to us to get a personalised asset allocation that can help you grow multiple income streams.

Is passive investing generally advocated by robos better than active investing?

A popular investment approach using robos is to invest in the robos’ recommended investment asset allocation that matches your risk profile and goals, and use it for the long term.

They are able to diversify your investments through various assets, sectors as well as geographical areas for you, unless you opt to DIY your own portfolio.

Typically, when you invest via robo-advisors, you may be invested in Exchange Traded Funds (ETFs) or unit trusts — and passive ETFs typically reflect the general performance of the indices they track.

As mentioned, the general idea behind robos is passive investing, and some people feel passive investing is better than active investing.

First, let’s highlight the biggest difference between active and passive investing styles.

For active investing, you are actively involved in the buying and selling of funds in your portfolio and other assets, with the goal of beating the market. It requires a high level of market analysis and expertise to execute it as involves knowing when is the right time to sell and buy.

If you don’t have the expertise and knowledge to manage your portfolio, you can outsource it to professionals such as FARs to help you.

Professionals usually have access to a wider range of information about every investment in their portfolios. This is why they are able to capitalise on short-term price fluctuations and still keep your asset allocation on track.

On the other hand, passive investing usually involves buying and holding assets for the long term. It is generally to match the market’s performance.

For you to consider an investment style, it all boils down to each individual’s capacity and goals.

• Are you investing for the short or long-term, or both?
• Do you have time to ride out the volatility of the market?
• Will you be happy with the returns you are getting by riding out the market’s volatilities in the long run?
• Or do you prefer to look for potential opportunities in any market condition?

This is why it is important for every investor to reflect on their ultimate investing goals — do you intend to follow or beat the market?

We feel that actually, both strategies should not be exclusive to one another. You can mix both strategies and still have an effective investment portfolio to reach your financial goals.

Here at The Money Folks, we use a weather-resilient investment strategy that adopts both passive and active investment approaches to achieve your goals.

Are robo-advisors suitable for you?

Investing using robo-advisors may be cheaper.

But should cost be the most important factor to look at when investing?

At the end of the day, robo-advisors are just a tool to help you manage your investments. It creates an opportunity for people to start investing and invest at their own convenience.

Although the accessibility is great, do keep in mind that they are generally a tool and not a form of human guidance to help an individual achieve financial independence.

Financial independence especially for retirement is more than just about optimising returns and lowering risks. You need a strategy, constant review and assessment throughout your investment horizon.

If anything, robos could be a complementary tool that is a part of a bigger and more holistic retirement portfolio.

Consult a professional FAR to help you craft an investment portfolio that can help you potentially achieve your financial goals.

With almost 10 years of experience, The Money Folks has helped more than 400 clients tailor-make comprehensive investment strategies to not just potentially achieve their financial goals but also establish multiple passive income streams for them as well.

The majority of our team is recognised as the top 5% of financial advisor representatives worldwide, and many of our clients are on track to potentially achieve their retirement goals 10-15 years earlier than planned.