A lot has been written about millennials in the past couple of years. We like avocado toast and the color pink and we don’t like investing. Well, that last one appears to be true. A recent survey by Ally Invest found that 66% of millennials are intimidated by the stock market. Considering that many of us came of age during the 2008 Financial Crisis, it’s no wonder we don’t trust investing.
But what would you say if I told you there was a simple way to start investing in the stock market with a high level of trust that didn’t require you knowing anything about dividends, capital gains, or net asset value (whatever that is)?
Robo-advisors are web-based or app-based services that use algorithms to create and manage investment portfolios without the need for a human advisor. Anyone can use a robo-advisor, with or without previous investment experience, but there are a few reasons why robo-advisors are particularly ideal for millennials and Gen Z’ers.
Take Advantage of Advanced Technology
As one article put it, robo-advisors “are good entry-level tools for people with small accounts and limited investment experience, namely Millennials.” We grew up during the dot-com boom, so taking care of business over the internet is second nature to us. Truth be told, some of us even prefer interacting with a robot than a human being.
If you’re skeptical, you might wonder whether an algorithm is as good as an expert investment professional. But it turns out stockbrokers have been using computer-based algorithms to give investment advice since the early 2000s. What’s new about the current generation of robo-advisors is that these algorithms are now available to the general public, not just financial advisors.
And the technology puts investing in your reach more than ever in countless ways. Instead of calling your financial advisor to perform a trade, you can just visit the website or open the app on your smartphone and make all the changes you want with a couple of taps. If you connect your bank account to your investment account, you can seamlessly transfer funds between them to cash out your earnings or put more money in your portfolio.
Robo-advisors are just one more way technology is making our lives easier.
Pay Less for Growing Your Wealth
Well, okay, “wealth” is kind of a strong word. But the point is that whatever you can save is your money. It may not seem like a lot now, but people generally invest for the future, not the present. Keeping an eye on fees is important. Human advisors typically charge an annual management fee of between 1% and 2%––and sometimes more––on the balance of your account. Meanwhile, robo-advisors generally charge between 0.2% and 0.5%.
Does this really matter? In one word, yes. Let’s say a company charges you 0.5% on your balance to manage your investments. You may have just $1,000 in your account to start with, but it grows and compounds at 3.5% per year. So on opening the account, you’ll pay just $5.00. But after one year, you’ll pay $5.18. And then $5.35 the next year. By the time you’ve had that initial $1,000 invested for ten years, you’ll have paid a total of $65.69 to get advice from an algorithm on managing a $1,000 investment. If the company charges you a 2% management fee, you will have paid over $200 at the end of the same 10 year period.
Save for Retirement and Other Big Expenses
Most of us aren’t thinking about retirement yet, but it’s a sad fact that retirement age is increasing. While many of our grandparents were able to retire at age 55, the trend now is for a 63 retirement age and it will only increase. Regardless of when you plan (hope?) to retire, though, the best time to start saving is yesterday. The second-best time is today. The sooner you start, the less painful the process will be. Putting $100 a week into a retirement account every week may seem extravagant if you’re just starting out, but on it will be easier that trying to contribue $500 a week when you’re in your late forties.
If saving for retirement doesn’t interest you much now, homeownership is at an all-time low among the younger generation. But that doesn’t mean we’re doomed to being tenants all our lives. The biggest obstacle to homeownership is putting together a down payment. A 20% down payment on a $100,000 house is $20,000, a figure that might as well be a trillion dollars to some people. But, once again, the sooner you start saving, the sooner you can move in.
Rely on Nobel Prize-winning Economic Theory
So, investing is a good idea. But are robo-advisors really trustworthy? To explain why robo-advisors are just as reliable––if not more so than human advisors––we have to get a little technical. Robo-advisors work by using a series of sophisticated algorithms to build your portfolio and determine when to buy and when to sell. There are different ways to create these algorithms, but most robo-advisors use a methodology called Modern Portfolio Theory. This theory was developed by economist Harry Markowitz in the 1950s. In 1990, he was awarded the Nobel Prize in Economics for his work, including the creation of MPT.
Before MPT, financial advisors would look at a particular asset and determine how risky it was. Modern Portfolio Theory is innovative because of the way it looks at the entirety of the portfolio to determine how much risk (losses) and return (earnings) are involved with a particular investment. MPT takes a holistic view of the financial assets and analyzes how an investment will affect the portfolio as a whole.
Robo-advisors take MPT to the next level by automatizing the analysis. Human error is taken out of the equation, as are conflicts of interest. The combination of all these factors result in a service that is reliable and efficient, as well as being less costly to investors.
Another reason why you can place your trust in robo-advisors is that they’re subject to the same regulations human advisors are. Robo-advisors have to register with the U.S. Securities and Exchange Commission (SEC), which requires brokers to submit periodic reports so you always know what the company is doing with your money. Robo-advisors can also become members of the Financial Industry Regulatory Authority (FINRA), a self-regulatory body that enforces best business practices among brokers and other securities firms.
If you want to compare robo-advisors or just check to see if the one you’re considering is legit, you can search FINRA’s BrokerCheck and the SEC’s EDGAR database. There, you can find information about the states in which the firm is licensed to operate and any past regulatory actions.
Take a Step Towards A Better Future
It’s hard out here for a millennial, I know. We have thousands of dollars in student loan debt, we live in expensive shoeboxes, and we’re anxious. Investing isn’t going to solve all our problems, but saving for the future can only be a good idea in the long run. Robo-advisors are a great option for affordable, trustworthy, and efficient investing for our future. To explore taking that step, check out our Top Ten Robo-Advisors and give one a try.