Investing Basics – How Robots Can Help You Improve Your Net Return
I haven’t written much here about investing outside of my post on my experiment opening a Roth IRA with Betterment. Since I pivoted away from Uber as a side hustle, I have had to close that account (Income is down 25%). I plan on resuming investing once I knock out the remaining $4,800 I have in student loans.
My current plan is to focus on increasing my income through other side hustles. Unfortunately, a freelance contract I was counting on fell through, but I will keep putting myself out there!
For now, the only investment vehicle I am contributing to is my pension at work, which I have zero control over. With that being said, I recently spoke with someone who has a wealth of knowledge about investing.
Today I am excited to share an incredible guest post from Alexander, who runs the blog DaytradingZ. There he writes about his experience as a day trader, retirement, artificial intelligence and other money topics.
Take it away, Alexander!
Investing Basics – How Robots Can Help You Improve Your Net Return
Thanks to the power of robo-advisors, today, the investing process is more accessible than ever. Free-of-charge trades execution, little-to-non management fees, low or non-existent account minimums – investing in the technological era is no more the game of the rich. Just the opposite – the AI-powered advisors have made the investing process a level-playing field. But robo-investing solutions are not only capable of reducing costs and bringing the process closer to the masses. In fact, in recent years, robo-based investing is slowly, but steadily establishing itself as the most efficient and profitable way of participating in financial markets.
Today, with a large variety of flexible and fully-functional solutions, investors are capable of easily optimizing the efficiency of their strategies. By employing robot-based investing algorithms, individuals are capable of completely outperforming the global benchmark and actively-managed human hedge funds.
Robot-based investing – how to take advantage
Nowadays, automated investing is responsible for more than 70% of the daily trading volume – this includes all order flow-related operations, such as order placement, processing and execution. However, when it comes to the client’s end, the whole investing process has started shifting towards computer-driven investment methodologies. If, a few years back, the application of complex investing strategies was available only to the “chosen ones”, today, in the world of technology, there are plenty of sophisticated investing mechanisms, available to the mass audience. Robot-based investing can be divided into two main categories:
Also known as robo-advisors, ready-made investing solutions are becoming a mainstay in the investing world. Currently, more than 8 million individuals in the USA only are relying on robo-advisors to take care of their investing needs. As of 2019, the assets-under-management in the industry are estimated at $749 billion (statistics only for the US market). This simply means that robo-advisors are steadily paving their way as a preferred investment solution.
But what types of investors are using robo-advisors the most? The truth is that these solutions are preferred mostly by beginners who have waited for so long and now have the chance to take advantage of advanced machine-driven investment techniques for free and with very low account balances.
Due to their flexibility and advanced features, robo-advisors are also a popular solution for experienced investors who prefer to take advantage of passive investing or who simply do not have the time needed to manage their portfolios. Backed with teams of Nobel prize winners and developed from the industry’s best and brightest specialists, robo-advisors are proving to become a good-enough-solution even for the more demanding individuals.
Propriety trading solutions
If you do not want to rely on ready-made solutions and have enough investing knowledge and expertise, you can also opt to hire a programmer to code your methodology in a simple robo-driven algorithm, capable of executing trades automatically. More and more brokers nowadays allow you to upload a trading script and get your robot assistant to help you with investing. And the truth is that today, the number of “hipster” investors who trade via propriety-developed investing methodologies is constantly growing.
This way of investing is suitable for more advanced individuals who do not want to be limited in terms of what instruments to trade, how much and what types of indicators to use and how complex their methodologies can be. However, developing a propriety trading solution is not an easy task as it often is very demanding in terms of resources and management.
No matter what type of trading solution one decides to choose, be it a robo-advisor or a personally-developed investing robot, the one main goal, in the end, is to find out the answer to the question…
How robots can help improve net return
The whole idea behind the employment of robo-based investing solutions is to streamline the process and optimize its efficiency. Or in other words – to help you become a better investor. In reality, the truth is that thanks to all the advantages they bring, in the fast-paced trading world of today, robots are becoming the investor’s best friend.
Robots can help you improve your net return by ensuring the following:
More accurate data analysis
The more data one takes into account when curating his investment strategy, the better the outcome. A few decades ago, the investing process relied heavily on the combination of analysis of extensive balance sheets and technical indicators. This resulted in massive amounts of information that took too much time to be analyzed and often made it hard-to-process accurately.
With the course of time, the amount of information, relevant to a particular investment decision became bigger and bigger. For example – today, we take advantage of sentiment scores that were not present a few years back. However, nowadays, computers are here to help. By being able to process large chunks of data, including a wide set of parameters, indicators and historical data, algorithms significantly speed up the whole analysis process. Machines are also capable of handling more data than humans, while at the same time minimize the risk of errors. The result from all this – more accurate decisions and improved net return.
Rebalancing is the process of periodically buying and selling assets to maintain the preferred asset allocation. Portfolio rebalancing is a low-cost, yet very effective management strategy that is often implemented in long-term investing. As such, rebalancing is core to the performance of one’s portfolio. However, it is not an easy task as it also requires a lot of time and analysis to find out which instruments are underperforming and which are overperforming.
Robots are capable of analyzing the portfolio performance on a periodical basis and take actions if needed. The goal of rebalancing is to keep the portfolio on the efficient frontier, thus ensuring that it has the best exposure in terms of risk/return. As investors usually are not capable of keeping constant track of the assets included in their portfolio, they often miss the moment when a certain instrument goes out of its threshold, which leads to skewed allocation. With the help of robots, rebalancing can take place automatically, thus maintaining an efficient portfolio distribution and increasing the net return potential.
Nowadays, investing is all about speed. In the market of today, good investment opportunities are often short-lived. This means that the faster one acts, the more profitable the trade will be. However, when the majority of the trading process is handled algorithmically, it gets even harder for average investors to compete with sophisticated and high-speed trading systems. The situation is very similar to the one where you are shopping and someone gets the last discounted product just in front of you. The result – in the end, you end with just two options – either to not buy anything (miss on a trading opportunity) or buy the product at a higher price (reduced net return).
Robots are capable of solving that problem, or at least help you short the gap with the more advanced and technologically-enhanced market participants, by helping you execute trades faster, thus get better rates. And getting the chance to be in front of the investing queue, means just one thing – you are improving your net return.
How Robots Can Help You Improve Your Net Return: Conclusion
Robot-driven investing is here to change the landscape. The benefits from all of that are numerous – from the more accessible technology, through improved flexibility, excellent cost efficiency and investing freedom, to the chance of taking advantage of advanced trading strategies. However, the one single and most valuable thing that robots will do for you if you add them to your methodology, is to make you a better investor by helping you improve your net return.
- Have you used a Robo Advisor before?
- How often do you rebalance your portfolio?
Jerry is a Business Insider Contributing Writer who is obsessed with personal finance. He believes you can improve your financial situation by applying principles taught by the financial independence community to your financial life.
If you are having trouble saving, he recommends that you join the SaverLife Savings program where you can get a $60 reward after six months (no income requirement). All you have to do is put a minimum of $20 a month into a savings account. Easy, right?
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