The time when we went to the bank and the financial advisor showed us how to invest our savings is ending. Not because you can’t do that anymore, now anyone can take a pc, open an account on a broker platform, and trade. But, today there are Robo-advisors.
The Robo-advisor is an automated financial consultant: it is provided by digital platforms. They use algorithms to combine user data and propose pre-established investment solutions.
In fact, to invest our money it is not enough to have easy access to financial instruments. Today you can turn on your PC and have a platform in front of you that allows you to buy or sell anything.
Gold, shares of Apple or Tesla, petroleum, the EurUsd, or the UsdCad. You can trade commodities. Not to mention cryptocurrencies: hundreds of cryptocurrencies. Options or indices such as DownJons or Dax (the German one).
In short, access to the entire world of finance.
But, very few have enough knowledge to operate in this market. The statistics speak for themselves: over 70% of people who invest money or trade, lose money.
Now, there are Robo-advisors that do not make some of these mistakes. That is, they also make mistakes. In finance, mistakes are part of the game. But at the end of the year, you will be more likely to get better results than if you act on your own.
HOW AUTOMATED CONSULTING WORKS
It offers you a model portfolio. It does its statistical calculations, based on the algorithms, and advises you which shares or other financial instruments to buy.
For example, 10% of your capital is in Apple stock. Another 10% on shares of another company. Another 20% in Bitcoin. And so on, on indices, commodities, and Forex.
“The Robo-advisor is a very popular tool in the world of finance. Basically, it is a financial advisory platform, provided by automatic systems .”
However, it should not be confused with a trading system. Because the Robo-advisor advises clients on the best investments. Then the user enters the market order.
But how does it come to produce an investment model?
- First of all, there is customer profiling. This profiling serves to define the characteristics of the investor, mainly in terms of risk you should take or if you even want risk, objectives, and/or financial constraints.
- Once the customer has been “framed”, the robot offers him investments that match his profile.
- Subsequently, the digital advisors propose automatic portfolio rebalancing services over time, as market conditions change.
This automatic system was born around 2000 in the United States and England. Then slowly spread.
There is a lot of interest in Robo-advisors today. People like to believe, that they are investing “alone”. In the sense that there is no other person to tell them what they should or should not do.
In reality, over the years these automatic algorithms have been supported by the various companies or banks that offer them also a human consultants.
ROBO-ADVISORS ARE AFFORDABLE
They are simple to use, cheap, and accessible directly online. There are three aspects that fascinate average users who have little access to Bitcoin, Stocks, Gold, Silver, and Oil.
I want to go straight to the aspect that interests us the most: how much it costs.
- For example, there are some brokers who offer digital advisors for free. Then, the brokers themselves earn commissions they take from the operations that the client makes through their broker platform.
“If, on the other hand, they are paid, it starts with fees like 50 dollars a month, with a one-off initial entry fee”.
- Others have fixed quotas that fluctuate around 0.3% of the capital.
- The last case is operators who propose a fee linked to the invested amount. It ranges from 0.4% to 1.3% per year for automatic consultancy.
- Finally, there are customized solutions that have higher prices.
Understand that for some services a minimum investment is required.
That is, they provide you (always under the conditions mentioned above) the Robo- advisor only if you have the money to invest.
Unfortunately, some companies start at $3,000. Creating personalized services that are provided with at least 200 thousand dollars of capital.
I don’t think there is anything to explain about the fact that it is available online: you don’t go to the bank and talk to a person who knows where you should put your savings.
You just open your pc and everything on your platform is shown to you. The same as if you are going to buy the financial instruments that the algorithm will recommend.
THE EMOTIONAL COMPONENT IS ELIMINATED
Maybe you don’t know it, but the most difficult aspect when trading or operating as an investor in the world of finance is emotionality.
What do I mean by emotionality? I’ll give you an example.
It’s like when you make a business plan. A plan to decide how to use the profits: one part in cash, another invest again in the company, another part as a reward and so on …
But, at a certain point, you decide to change the plan because momentarily you believe it is better to do something else. Another investment in the company’s machinery, or to review the various odds without making the necessary assessments that you did at the beginning when you made certain decisions.
So when you deviate from the plan without following an in-depth analysis, trouble happens. Because you did not make a thought-out choice, but the result of momentary emotions that you believe are good intuitions.
This poor decision-making often happens in trading. Those who lose money, make momentary decisions without in-depth analysis based on facts.
This is where we make a mistake.
“Which doesn’t happen with the robo-advisor: being an automatic robot he doesn’t get caught up in emotion. All the suggestions he gives you come from in-depth planning and analysis”.
Then, over time, when it recalibrates your portfolio, the digital advisor does it through a further study based on the algorithm. The algorithm only works within parameters and initial settings.
Why is it so essential to be faithful to those initial plans built on a statistical basis?
Simple… in the world of finance, statistics are everything. The only predictions that can be made are those made on a statistical basis.
All other decisions are based on emotions and presumed experience which has no basis to be validated.
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