Robo-advisors have revolutionized investing by offering automated, algorithm-driven financial planning services with minimal human intervention. Using robo-advisors like Wealthfront or Betterment can save you money compared to hiring a wealth management firm. However, your approach should still have some hands-on aspects.
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Below, three financial experts weighed in with money moves they’d recommend for people using a robo-advisor.
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The foundation of a successful investment strategy is a clear set of financial goals. Whether you’re saving for a down payment on a house or planning for retirement, it’s important to have specific objectives to guide your investment decisions. Setting goals isn’t something you can outsource to a software program.
Robo-advisors typically offer goal-setting tools that help you visualize your financial objectives and track your progress. Use these features to align your portfolio with your aspirations. By setting more precise goals, you’re helping the robo-advisor better customize your investment plan.
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Everyone wants to pay less in taxes, and you can use a robo-advisor to help maximize your tax efficiency. “Tax-loss harvesting can help you offset gains and reduce your taxable income, said Kelan Kline, financial expert and the owner of The Savvy Couple. “This allows you to keep more of your investment returns working for you over the long term.”
Many robo-advisors offer tax-loss harvesting features that will automatically sell losing investments to reduce your tax liability. Tax-loss harvesting can be particularly advantageous in taxable accounts, as it helps minimize your capital gains taxes.
Your risk tolerance is central to your investment strategy, and it can change over time. Risk tolerance, according to Charles Schwab, is your willingness and ability to handle market volatility and potential losses. As your financial situation and goals evolve, your risk tolerance may change, as well.
Chunyang Shen, financial expert and founder of Jarsy Inc., noted,”You have to assess and rebalance your risk tolerance each time you go through significant life changes like a job change or reaching retirement.” For example, a young professional with a new, higher income and a long investment horizon might be comfortable with a higher level of risk, while someone nearing retirement may prefer a more conservative approach.
