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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.
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About the Author
Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.
The work he did laid the foundation for what would later become the VIX - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.
Shah founded a second hedge fund in 1999, which he ran until 2003.
Shah's vast network of contacts includes the biggest players on Wall Street and in international finance. These contacts give him the real story - when others only get what the investment banks want them to see.
Today, as editor of Hyperdrive Portfolio, Shah presents his legion of subscribers with massive profit opportunities that result from paradigm shifts in the way we work, play, and live.
Shah is a frequent guest on CNBC, Forbes, and MarketWatch, and you can catch him every week on Fox Business's Varney & Co.