Over time, I have found that, for myself, the easiest way to get the most consistent results in life is to automate a task. If I set up auto bill-pay, my bills get paid on time. If I set automatic reminders, I remember all special events. The same is true with investing. You always hear the advice from all the personal finance gurus — pay yourself first. How much better would that work if you automated your entire investment system?
There are four main investment services called “robo-advisors” — Betterment, Wealthfront, Personal Capital and traditional online brokers, like TD Ameritrade. They all base their service on Modern Portfolio Theory — asset allocation, diversification, and rebalancing are all part of a goal-oriented investment strategy built on time-tested economic concepts. Each robo-advisor option provides the five basic ways to drastically increase wealth over time, which I outline in this post.
Robo-advisors help keep expenses low, which is critical to building long-term wealth. They also provide an automatic way to build a diversified portfolio. Asset allocation and diversification across many asset classes is key to building wealth. They automatically re-balance the portfolio to keep the asset allocation percentages intact. Each service makes it easy to automatically contribute to the plan. You can set up an automatic plan to add money from your checking account into your investment account. And each robo-advisor automatically invests the dividends earned back into your investments. This increases the impact of compounded return over time because you start to get dividends being paid off your re-invested dividends — a beneficial cycle, indeed.
Each service has its pros and cons. Let us dig a little deeper and go into a detail about each.