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Automated investment services, or robo-advisories, are taking over the world.
Well, not quite.
But they are getting lots of attention and attracting billions of dollars.
While I'm a huge fan of the concept of automated investing services and I believe they will get a lot better, they're far from "there." And they're not for everyone.
You'll need to keep your eyes open so you don't get sideswiped by the internal conflicts some service providers present, and don't end up down a rabbit hole you didn't see on the horizon.
Here's who should seriously consider using a robo-advisor, how they should be used, and what to look out for…
Who They Could Help, Who They Could Hurt
Anybody who wants be invested in the market but doesn't know how to start should consider opening up an account with a robo-advisor.
Anybody who is a DIY investor, who hasn't been successful doing it yourself, and doesn't want to pay for a full-service broker, should also consider opening up a robo-advisor account.
Anybody who isn't happy with the performance of their stockbroker or wealth manager – especially in terms of how much fees and commission are eating into their returns – should consider opening up a robo-advisor account.
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Robo-advisory services make investing in the markets, building a diversified portfolio, and automatically rebalancing it incredibly simple.
And simple is great if it gets individual investors off the sidelines and into the game. Or if you haven't been successful doing what you've been doing and want nonbiased (for the most part) advice on establishing an investment portfolio, automated services are a simple answer.
Unfortunately, under the hood, robo-advisory portfolio construction and rebalancing principles, pricing theories, and the math inherent in convening all the moving parts that make investing in general more of an art than a science, is anything but simple.
I've written a lot about what's under the hood of these services, but you don't have to understand everything about what's under the hood (the complex math, for example). You just have to know what to do when the investment car that's being auto-driven for you looks like it's heading for a brick wall.
A False Sense of Security
First of all, would you get into a driverless car today and just fall asleep, or read, or talk on your smartphone as if the technology had been perfected? Of course you wouldn't.
Just because your investment portfolio has been automatically created for you doesn't mean you shouldn't know exactly what's in there and where the ride's taking you.
Automated doesn't mean blind. You should always know what's in your portfolio and how each of the positions are doing, whether they're making money or losing money and what your account balance is doing relative to the market.
The problem with robo-advisory services, and it's a giant problem, is that a lot of investors aren't going to pay attention to what's in their portfolios and how they're doing.
That's no different than investors buying mutual funds and expecting that mutual fund managers will just make them money with their picks and rebalancing strategies.
About the Author
Shah Gilani is the Event Trading Specialist for Money Map Press. He provides specific trading recommendations in Capital Wave Forecast, where he predicts gigantic "waves" of money forming and shows you how to play them for the biggest gains. In Short-Side Fortunes, Shah shows the "little guy" how to make massive size gains – sometimes in a single day – by flipping large asset classes like stocks, bonds, commodities, ETFs and more. He also writes our most talked-about publication, Wall Street Insights & Indictments, where he reveals how Wall Street's high-stakes game is really played.