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Set it and forget it: How to automate investing with robo-advisors

Yahia Barakah
Updated
How to automate investing with robo-advisors (Yuichiro Chino via Getty Images)

You can automate investing with a robo-advisor even if you have little or no investment knowledge. That’s because robo-advisors take a lot of the hard work off your plate by using algorithms to build and manage an investment portfolio. It means you don’t have to actively manage your investments or hire someone to do it for you.

Setting up an automated portfolio with a robo-advisor is pretty straightforward: you choose a robo-advisor platform, set up your account, answer a few simple questions about your goals and add funds to your portfolio.

Having personally experienced the benefits of this approach, I’ll guide you through each step of automating your investments. Let’s dive right in.

Investing used to feel like a full-time job of researching stocks, analyzing market trends and second-guessing every decision. However, Wealthfront forever changed the investing scene after it introduced the first robo-advisor in 2008.

This robo-advisor and many more that followed offered investors a new way to manage their portfolios with minimal effort. These new investment platforms quickly gained traction, making professional investing accessible to more people.

A robo-advisor is an online platform that uses advanced investing algorithms to handle your money and investments with little input from you. These automated platforms create a mix of different investments for you based on three main factors:

  • Investing goals — what you want to achieve with your money, such as saving for a house or retirement.

  • Risk tolerance — how comfortable you feel about the possibility of losing some money to potentially gain more.

  • Time frame — how long you plan to invest your money to reach your goal.

The resulting investment portfolios typically use exchange-traded funds (ETFs) and mutual funds, which work as large baskets of hundreds or even thousands of stocks and bonds. This diverse mix spreads your investments across various sectors, which can help smooth out market volatility.

Robo-advisors simplify the work you need to invest by using several automated processes:

  • Portfolio creation. During the signup process, your robo-advisor typically asks you a few general questions about your age, goal, financial situation and investment experience. From there, it uses the answers you provide to generate an investment portfolio tailored to you.

  • Asset allocation. Some assets are riskier than others. For example, stocks tend to experience more volatile ups and downs than bonds. Robo-advisors use these differences to allocate your money to various assets, giving you a balanced, diversified portfolio.

  • Portfolio rebalancing. As the market moves, your portfolio may shift from its original asset allocation over time. Most robo-advisors periodically buy or sell assets to rebalance your portfolio back to its optimal allocation.

  • Tax-loss harvesting. Robo-advisors don’t guarantee that your investments will always grow. But some robo-advisors sell losing assets to offset your gains, which can reduce how much taxes you pay on these gains.

  • Dividend reinvestment. Some of your assets may earn regular profit payouts known as dividends. Your robo-advisor can help you reinvest these gains back into your portfolio to keep your money working for you.

While these processes don’t fully replace human financial advisors, they handle many daily investing tasks without needing your constant attention. This allows you to “set it and forget it,” as your robo-advisor works 24/7 to keep your portfolio on track.

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Robo-advisors can be a powerful tool for investors. But like every investment platform, they have their own set of benefits and drawbacks.

Robo-advisors offer competitively low advisory fees. Some robo-advisors charge no advisory fees. This is a great perk for both new or experienced investors, as it puts more of your money toward your future goals. Most robo-advisors also have low minimum balance requirements, making it easy to start investing with less than $100. Plus, the simple setup process makes it even easier to get started.

However, robo-advisors lack the personalized touch you’d get with a human financial advisor. This also means you typically won’t work with a dedicated advisor who knows your personal financial situation. For example, you might have a 401(k) plan, a house and savings in a bank account. Your robo-advisor would have limited insight into these external assets, while a human advisor could consider your overall financial picture when making recommendations.

I was pleasantly surprised by how simple the setup process was when I first used a robo-advisor. Here are the steps you can take — even with no investment experience.

When choosing a robo-advisor, consider these key factors:

  • Advisory fee. Find out how much it costs to manage your investments with a robo-advisor. This advisory fee is usually a percentage of your invested funds. For example, Wealthfront charges a 0.25% annual fee, which comes down to about $25 a year for every $10,000. SoFi, on the other hand, doesn’t charge an advisory fee.

  • Features. Consider which features matter most to you, as robo-advisors vary in their offerings. For example, Wealthfront offers tax-loss harvesting, while SoFi doesn’t.

  • Minimum investment. Choose a robo-advisor that accepts your initial investment amount. For example, Betterment has a $0 minimum investment, while Charles Schwab requires $5,000 to get started.

  • Account types. Ensure your robo-advisor offers the type of account you need. For example, some robo-advisors like Wealthfront offer individual retirement accounts (IRAs) and 529 college savings plans, while others don’t.

  • Protections. Look for a robo-advisor that offers insurance from the Securities Investor Protection Corporation (SIPC). While insurance doesn’t protect you against market losses or fraud cases, it does protect up to $500,000 of your investments and cash against broker failure.

🔍 ETFs and mutual funds have their own fees, typically called expense ratios that generally range from 0.01% to 0.40%. However, most robo-advisors use funds with low expense ratios. For example, my robo-advisor mostly uses funds with annual expense ratios below 0.10%.

I initially chose Charles Schwab for its tax-loss harvesting, round-the-clock access to investing professionals and zero advisory fees. However, I later switched to SoFi when it launched its robo-advisor in 2019, offering a $1 minimum investment and no advisory fee.

You’ll follow three general steps to set up your account with your chosen robo-advisor,:

  • Sign up online. Most robo-advisors offer fully online signup, so you don’t have to visit a branch or make a phone call to open your account.

  • Answer a simple questionnaire. Most robo-advisors will ask about your age, income, total assets and goals to help build your personalized portfolio.

  • Link your bank account. You can use your checking or savings account to transfer your initial deposit to your robo-advisor.

Setting up a robo-advisor account took me less than 30 minutes, with account approval arriving within one or two business days.

The name of the game with robo-advisors is hands-off investing. But how can you grow your investments without getting caught up in complicated strategies?

One tried-and-true strategy that many hand-off investors use is dollar-cost averaging. This is a fancy term for a simple four-step strategy:

  • Choose a fixed amount to invest regularly. Decide how much and how often you want to transfer money from your bank account to your robo-advisor.

  • Let your robo-advisor do the work. Once the money is in your investment account, your robo-advisor will use it to buy a mix of assets.

  • Maintain your regular transfers regardless of market conditions. Continue your regular transfers whether the market is up or down.

  • Watch how this strategy balances your costs over time. This is where it gets interesting. Your fixed amount buys fewer shares when prices increase, protecting you from overinvesting at high prices. On the other hand, it buys more shares when prices decrease, taking advantage of lower prices.

Let’s take a look at how this strategy plays out in real life. Let’s say you decide to transfer $100 each week. In the first week, your robo-advisor buys 10 shares at $10 each. The following week, the price increases to $20 per share, so your robo-advisor buys only five shares. In the third week, the price drops to $5 per share, allowing your robo-advisor to buy 20 shares.

You’ve now invested $300 in 35 shares. This averages $8.57 per share, well below the $20 per share you’d have paid if you had invested a lump sum when the market was high.

The beauty of this approach is that it frees you from monitoring the market or predicting its movements, which helps limit emotional reactions and rushed decisions. Plus, you can automate it all, from regular transfers to share purchases. As someone who values time, I appreciate how robo-advisors save me time while providing peace of mind.

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Here are five of the most popular robo-advisors on the market today. These robo-advisors offer low or no advisory fees and useful features for hands-off investors.

  • 💸 Advisory fee: $4 monthly for balances under $20,000 or 0.25% annually for balances of $20,000+

  • 💰 Minimum investment: $0

Betterment is a one-stop shop that offers automated investment management, socially responsible investing options and retirement planning.

Sign up at Betterment

  • 💸 Advisory fee: 0.25% annually

  • 💰 Minimum investment: $500

Wealthfront launched the first robo-advisor back in 2008. Today, it remains one of the most popular robo-advisors, offering access to various account types including IRAs and 529 college savings plans.

Sign up at Wealthfront

  • 💸 Advisory fee: 0% annually

  • 💰 Minimum investment: $1

SoFi stands out with its no-fee structure and low minimum investment. It provides access to diverse assets, including real estate and commodities.

Sign up at SoFi

  • 💸 Advisory fee: 0% annually

  • 💰 Minimum investment: $5,000

Charles Schwab is a well-established brokerage service that pioneered lower investment fees in 1974. Today, it maintains its commitment to minimizing fees by offering its robo-advisor with zero advisory fees.

Sign up at Charles Schwab

  • 💸 Advisory fee: 0.20% to 0.25%

  • 💰 Minimum investment: $100

Vanguard is a financial advisory firm well known for its retirement management services. Its robo-advisor features low fees, socially responsible investments and access to actively managed funds.

Sign up at Vanguard

There are various investment options that give you varying degrees of automation or direct control. These options include traditional financial advisors, target-date funds and self-directed investing.

Robo-advisors use algorithms to manage individual investment portfolios. These algorithms do a pretty decent job at allocating your money toward ETFs that cover broad markets, including U.S. companies, bonds and international stocks. Due to their high level of automation, robo-advisors typically charge low annual advisory fees of 0.25% or less.

In contrast, traditional human advisors provide highly personalized advisory services that consider your entire financial situation. They’re better equipped to handle complex financial situations and provide tailored advice around financial guidance, estate planning and taxes. Many financial advisors charge an annual fee of about 1% of the assets they manage.

Robo-advisors assess your goals and risk tolerance to offer personalized investment portfolios. They continuously monitor and rebalance your portfolio based on market conditions and changes to your goals and risk preferences. Robo-advisors typically charge low annual advisory fees of 0.25% or less. However, remember that the funds they use may have additional expense ratios.

Target-date funds focus on retirement savings with a straightforward approach that offers less personalization than robo-advisors. They gradually shift your investments from riskier assets like stocks to safer ones like bonds as you near retirement. Though less flexible, target-date funds offer a truly hands-off approach for people who prefer simplicity. They also typically have no advisory fees, but their average annual expense ratio is 0.44%, according to Vanguard.

Robo-advisors are ideal for those with limited investment experience or who prefer a hands-off approach, saving time on research and portfolio management. Depending on the robo-advisor you choose, you may pay little or even no annual advisory fees. However, robo-advisors typically limit your ability to make specific investments in individual stocks or assets.

Self-directed investing gives you full control over your investment portfolio through your own brokerage account. This option suits those who enjoy investment research and understand market dynamics well. With self-directed investing, you avoid advisory fees by relying on your own knowledge. Plus, many brokerages now offer commission-free trading, making self-directed investing highly cost-effective.

Still not sure whether a robo-advisor fits your budget and needs? Learn more about how these automated investment platforms work.

Yes, robo-advisors are generally as safe as traditional investment methods. To confirm that your robo-advisor is legitimate, make sure it’s regulated by the Securities and Exchange Commission (SEC) by searching the SEC database. Also check that it’s regulated by the Financial Industry Regulatory Authority (FINRA) using FINRA’s BrokerCheck. Additionally, get an additional layer of protection against brokerage failure by using robo-advisors that offer insurance from the Securities Investor Protection Corporation (SIPC). Lastly, look for robo-advisors that use bank-level encryption to secure your information and account.

Yes, your investments with a robo-advisor can lose value due to market conditions. As with all investments, your robo-advisor portfolio may decline in value during market downturns. This can affect both your profits and initial investments. Remember, protections such as SIPC insurance don’t safeguard against losses from market movements.

Tax-loss harvesting is a strategy that helps reduce your tax burden by selling losing assets to offset profits you made from other investments. For example, if you made a profit of $1,000 in a year, you could partly offset this gain by selling an asset that lost $200. This effectively reduces your total profit, lowering your tax liability.

Robo-advisors don’t guarantee outperforming the S&P 500, a market index that tracks stocks of the biggest 500 U.S. companies. However, many robo-advisors use ETFs or mutual funds that closely track the S&P 500’s performance. For instance, Vanguard Digital Advisor might invest some of your money in the Vanguard 500 Index Fund, which mirrors the S&P 500.

Yahia Barakah is a personal finance writer at AOL with over a decade of experience in finance and investing. As a certified educator in personal finance (CEPF), he combines his economics expertise with a passion for financial literacy to simplify complex retirement, banking and credit topics. He loves empowering people to make informed financial decisions that improve their everyday and long-term wellness. Yahia's expertise has been featured on FinanceBuzz, FX Empire and EarnForex. Based in Florida, he balances his love for finance with freediving, hiking and underwater photography.

Article edited by Kelly Suzan Waggoner

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