How Automated Investing Works

Key Takeaways

• Connect Invest's Short Notes provide automated monthly interest payments, enabling a hands-off investment experience.

• Pros of automated investing include cost-effectiveness, accessibility, and consistent strategy application, while cons include limited complexity and lack of personal touch.

• Popular automated investing methods include robo-advisors, employer-sponsored retirement accounts, DRIPs, and round-up apps, each offering unique benefits.

• Automated investing leverages technology and algorithms to streamline investing, appealing to both beginners and experienced investors.

• Robo-advisors offer low-cost, tailored portfolio management with 24/7 monitoring and rebalancing.

We live in a fast-paced world where the competition for our attention is neverending. Technology has been woven into almost every facet of our lives, including investing. Thanks to automated investing, the overwhelming demands of managing investments manually are a thing of the past, and beginner and seasoned investors have discovered it's a game changer. 

Automated investing is tech-driven and uses algorithms and mathematical models to invest money for a client. Investors who like technology will especially appreciate how streamlined and cost-effective it can be.

It may all sound futuristic, but join us as we explore automated investing, its benefits and drawbacks, and how you can get started.

What is Automated Investing?

Automated investing, a relatively new phenomenon, emerged in the late 2000s. It uses algorithms to build passive portfolios that focus on the long term.

Robo-advisors can be found on some automated investment portfolio management platforms. What is a robo-advisor? It's a digital platform that uses algorithms to offer financial planning and investment services—all with little or no human supervision. 

When you interact with a robo-advisor, you will be asked about your financial situation and goals for the future. Based on your answers, the robo-advisor will advise and invest on your behalf. 

Automated investing can also be set up to deposit funds into your investment account. For example, money can be withdrawn from your paycheck and transferred to your 401(k). The best automated investing tools are an important strategy for compound investment growth and are designed for beginners and experienced investors alike.  

How Does Automated Investing Work?

There are a few easy steps in learning how to get an automated investment plan, but as you'll discover, the technology and its use of algorithms make up the lion's share of the work. Generally, you can expect the following when automated investing:

• Client Onboarding - The robo-advisor will ask a series of questions to gauge factors such as risk tolerance, goals, timeline, and financial situation.
• Investment Strategy Recommendations - The robo-advisor uses the answers to develop a personalized investment strategy.
• Asset Allocation—By using the investment platform, the robocaller takes client funds and distributes them across asset classes, which could include stocks, bonds, and real estate investment trusts (REITs).
• Execution of Trades - Buying and selling assets is performed automatically to maintain the asset allocation outlined in the investment strategy.
• Rebalancing - If a portfolio drifts from the defined strategy, the platform will automatically adjust.
• Continuous monitoring - Automated investment portfolio management monitoring is constant. 
• Tax Optimization—Some of the best automated investing platforms offer features such as tax-loss harvesting, which helps clients minimize capital gains taxes. 
• Compliance with Regulations - There are regulatory requirements protecting investors that automated investing platforms must follow.

Benefits and Negatives of Automated Investing

Weighing pros and cons when making investment decisions is an essential strategy, and the same holds true when discussing "What is automated investing?" Let's examine some of the benefits and drawbacks of automated investing.

Pros

• Cost-effective - Traditional human advisors are more expensive than automated investing platforms.
• Accessibility - Low or no minimum investment requirements make automated investment platforms highly accessible for beginner and experienced investors.
• Efficiency - The algorithms can trade and rebalance a portfolio very quickly and accurately in real time.
• Consistency - The rules and strategies for automated investing are predefined, helping to eliminate bias and emotional decisions.
• Diversification - Many automated investing platforms aim to offer diversified portfolios that spread out risk.
• Customization - The platforms customize portfolios based on investor preferences, risk tolerance, and goals.
• Availability -  Automated investment platforms don't need to rest and are available 24/7 for continuous monitoring and management.

Cons

• Lack of personal touch - Human advisors provide personalized advice and connections that automated platforms can't. 
• Limited complexity—Automated investing platforms are often best for standard strategies and may not be ideal for complex or special-needs financial planning. 
• Potential oversimplification—Algorithms do have their limits, and they may oversimplify market complexities, resulting in decisions that aren't optimal.
• Technology risks - Technology is not immune to glitches, errors, and cybersecurity risks.
• Lack of control - Automated investing may feel restrictive for investors who like hands-on control and decision-making.
• Potential conflicts of interest—Affiliations with specific financial products may put some automated platforms at risk of conflicts of interest. 
• Market sensitivity—Market volatility may cause the algorithms to react in ways that don't align with the investor's long-term goals or risk tolerance.

How Do I Begin Automating My Investments?

Before automating your investments, define your financial goals and risk tolerance. From there, you can choose a platform that best aligns with you. Take the time to compare fees, required minimum investments, and each platform's options. Once that research is completed, you'll be ready to open an account, work with the robo-advisor to answer its questions, review the recommended portfolio, and put funds in your account. 

As a general rule, you must be at least 18 years old to open an investment account, and most platforms require that you be a citizen or legal resident of the country where the platform operates. Remember to be certain that you understand the platform's minimum requirements.  Of course, you'll need a bank account and an SSN (social security number) or TIN (tax identification number).

Automating investing is relatively quick and easy, but you'll still want to carefully read the FAQ section for the platforms you are considering.

Popular Automated Investing Methods

Investing should be personalized and take your financial goals and timeline into account. With the growing interest in automated investing platforms, a few have risen to become quite popular. These include:

• Robo-advisors—There are robo-advisors such as Wealthfront, Fidelity Go, and Betterment that offer a low-fee option for investors. After a robo-advisor creates their portfolio, investors set up an auto transfer into their account. The robo-advisor continues to monitor the portfolio and make adjustments as needed.
• Employer-sponsored retirement accounts - Most employers offer a way for their employees to save for retirement through a 401(k), 403(b), or 457; some have a plan for matching contributions up to a specific amount. The money is invested in stocks, bonds, and balanced funds, and no taxes are applied while the money grows.
• Dividend reinvestment plans (DRIP)—A DRIP is an option that automatically reinvests dividends and capital gains payments from an investment account in the same asset. This allows the value of an account to compound more quickly.
• Recurring transfer—You can regularly transfer specific amounts of money from your checking or savings account into your investment accounts. The transfers can be deposited into a taxable investment, retirement, or any account on a schedule that you determine.
• Rounding up—Round-up apps can be linked to your debit or credit card. Every time you use your card, these apps will let you round up from the next dollar to ten times the original amount, and that money will be automatically transferred to your investment account. Cents add up, and it's an easy way to grow wealth.
• Short Notes - While Connect Invest's Short Notes don't allow you to automate funds from your bank account at specific intervals, our investments are automated in how you fund your money, sit back and relax during your investment period, and collect monthly interest disbursements without any work. Your fixed-rate, monthly interest disbursements are automated payments deposited to your account monthly during your investment.

Parting Words

Automated investing is one of the smartest ways to compound wealth for many solid reasons. It helps remove the tendency to underinvest in your future and saves you time. The algorithms of robo-advisors ensure that they create excellent, set-it-and-forget-it investment portfolios catered to your goals and timeline.

Workplace retirement accounts offer automated deductions that are deposited directly into your retirement account, and many employers also provide the additional bonus of matching contributions. 

Dividend reinvestment assists you in compounding your wealth and can help you avoid capital gains and other taxes. 

If you're serious about planning for your financial future, now is a great time to consider automated investing!