Guest Post Provided by: Andrew Altman w/ Slick Bucks
Automated investing solutions can invest small amounts of money for you at a time. From very small investments that trickle out of your account to investments that round up all of your transactions (thereby investing your spare change), these apps make it easier for you to get into the habit.
But are they a gimmick or are they actually effective?
Pro: You Can Invest in Small Increments at a Time
One of the major reasons investing can be such a huge hurdle is that you may need to save up several thousands of dollars to begin.
Automated investing solutions usually only require a few dollars to get started — sometimes even just a few cents. This gives you a certain amount of freedom, without feeling overwhelming.
Of course, there’s a downside to this too; it means that you may not be investing as much money as you otherwise could.
An example of an automated investing application is Betterment.
Con: You Can’t Take Advantage of Large, Bulk Investments
Because you’re investing seconds at a time you may also lose out on more profitable investments. Investing a few thousand in an IRA could take longer, but it would ultimately save you more (when taking into account the tax advantages). By investing in a trickle, you’ll probably be getting lower returns… but you’ll also be establishing lower risk.
The most profitable investments are generally the larger ones; they have a barrier to entry because they are targeted at more knowledgeable investors who understand the risks associated with their portfolio.
Pro: You Often Won’t Even Notice Your Investments
Because you’re only investing a little at a time (and it’s automated), you won’t really notice that you’re investing — and that means that it’s not going to be a substantial hardship to do so. When you tally up all your spending at the end of the month, it’s possible that your investments aren’t going to be a substantial amount of your monthly budget.
But that’s, of course, a double-edged sword: you won’t notice your investments because they’re a small amount of your overall budget.
Con: You Need to Separate Savings Apps and Investment Apps
Some of these automated solutions really only save small increments of money — and maybe give you a small amount of return, if that. Others actually invest your money for you as it trickles in, cent by cent. Good example is Acorns which allows you to invest your spare change.
The difference between a savings app and an investment app is primarily one of amount: a “savings” app is going to give you interest on par with a regular savings account, an investment app is going to yield higher returns but also offer a certain amount of risk. It may not always be clear what mechanism the app uses to calculate out your interest.
Pro: You Will Be Investing Steadily in Your Future
Though you can only invest very small amounts at a time through many of these solutions, it does mean that you’re going to be investing steadily from the outset. The earlier you get started (in terms of your retirement planning), the better.
If you’re fairly young and you’re just starting as an investor, an automated investing solution is going to be far more useful to you. If you’re older and you’re thinking of retiring within the next decade or two, it may have limited usefulness.
Con: You May Not Be Appropriately Diversified
Depending on the type of automated investing you’re doing, you may not be able to fully control the diversification and risk of your portfolio — and you’ll only have that single portfolio.
You may not want to rely upon a single automated investing application, or you may have to do some additional research to allocate your automated investments appropriately.
So, is automated investing a good idea?
The bottom line is that automated investing apps are a fantastic way to begin investing now.
For those who haven’t invested before or who just need a little more of a push, it’s a great place to start. But because you won’t be investing a large amount of money, it shouldn’t be the only way you invest.
Instead, it should be used to augment your existing investments or to get started.
You can read more of Andrew’s articles at www.slickbucks.com
Do you use an Automated Investing app? Comment below.