Older investors sometimes struggle to understand why everyone seems to think they can invest successfully these days. We learned how to invest through education, natural aptitude, and by putting in hours of work. Are we really supposed to believe that someone working a full-time job in a non-financial sector can become a successful investor on the side?
This, of course, is a false equivalence. Our early experience in investing barely resembles what investing is like for a twenty-something-year-old today. We’ve seen it evolve, and so the changes haven’t seemed so drastic, but it is really a different beast entirely. Today, a new (or experienced) investor can leave the job to a robo advisor. You can easily find a regulated robo advisor in Canada, the US, or the UK, and people swear by them.
This may be anathema to some, as it is human insight that has always governed good investment strategy. However, let’s take a quick look at what exactly has changed.
The biggest change we’ve seen in this sense is the rise of big data. As recently as twenty years ago, the concept of big data was laughably small. We had found efficient ways to collect and store data and governments and companies could easily share it among themselves. This data was of some use in advertising, sales, and making good investment decisions. But it comes nowhere near to what has happened since then.
Today, no matter how high you set your privacy settings, no matter whether you use Facebook or not, you are constantly feeding data to the beast. We live our whole lives online, and big data therefore tracks our characteristics not according to what we say but according to what we do.
The same is true in financial markets. Everything done by everyone becomes part of the collective. Yet this information on its own is useless. One person cannot hope to know even a tiny fraction of a percent of the data, and therefore can’t make decisions with it.
However, a robot can.
What is a Robo Advisor?
A robo advisor sounds like a whirring embodiment of Siri following you around giving you advice. But it’s obviously nothing nearly as fun (or old fashioned). A robo advisor simply uses a set of algorithms to make sense of the immense data available. It can therefore make investment decisions for you, with more of a basis to go on than you could ever hope for.
Now, robo advisors are not entirely automated. They are still overseen by humans. This is because we have not yet discovered a way for AI to learn the subtleties that humans are so good at spotting. But human intervention is more suited to facilitating the process than actually making the decisions. AI stands for Artificial Intelligence – software that makes smart machines like computers and robots think and behave like humans.
The use of a robo advisor is not for everyone, however.
Who Should Use a Robo Advisor?
Firstly, there are those who should definitely not use a robo advisor. Some of us will just never be able to trust an algorithm to effectively do what we’ve been doing for so long. Mistrust and robo advisors don’t go together, as you’ll just end up throwing the process off. If you’ve been investing for years, and you have the time to do so, a robo advisor isn’t for you.
However, a robo advisor is perfect for someone who has a full time job in a different sector altogether, who doesn’t have the time to become an expert trader or to micromanage their own investments. It is for someone who is looking to invest with a wait-and-see approach. It is for someone who finds the neverending choices overwhelming but wants to make the most of their money anyway. It is even for someone who doesn’t really “get” the markets but has some money they are willing to invest anyway.
What About a Human Advisor?
Does a robo advisor beat a human advisor at the job? Well, not necessarily. There are some excellent human investment experts who will do an amazing job with your money. They have the abilities to pick up subtleties that a robo advisor might not, and have more flexibility.
However, a good human advisor is going to cost you a lot more, and you’ll need to be investing at a much higher level. For example, a minimum investment with a robo advisor may be $5,000, while a minimum investment with a human advisor will be ten times that amount. If you’re just trying to invest some of your savings, rather than attempting to make big money, a human advisor is just not an option.
In other words, if you want to invest big money and make huge returns, you either need to do your own investment or hire someone at a high cost.
But if you want to invest out of interest, to see where it can get you, and you don’t have the time to commit to learning the ropes, a robo advisor is an excellent option.