While the last year in the markets has been tame compared to the quick gains we saw during the onset of 2020, certain strategies and tools have proven profitable when in the right hands.
Automated trading has been around for nearly half a century now. We’ve covered its history in this article. As this technology continues to improve, certain misconceptions make it likely to confuse and deter potential investors.
In this article, we’ll be debunking the common myths surrounding this revolutionary tech.
Automated Investing is Expensive
Automation is typically more affordable than traditional investing methods. Most robo-advisors charge a much smaller amount than their human counterparts. You can find management fees anywhere from 0.25% to 0.50% of your total account balance annually, a much smaller amount than the 1% to 2% charged by human financial advisors.
Other automated investors even make it a point not to charge anything if you don’t make money with their services.
Peccala, for example, only charges a portion of the profit that you make through their service. This incentivizes us to keep investing in R&D and continue improving the trading technology - because a win for you is how we keep our office lights on.
Profit-sharing ensures that we keep providing our users with the best possible service at the lowest cost.
Automated Investing Is Too Technical
While the science, algorithms, and data models behind automated traders are admittedly complex, platforms make it a point to prioritize good user experience for customers. Companies invest millions of dollars to create an easy-to-navigate interface that engages the customer while educating them on how to best manage their assets.
The bottom line: Investment platforms make it a point to make the customer experience as seamless as possible.
Everything from account creation to making your first deposit and investing on the platform is made as easy as can be, so that customers can go about their day-to-day with the confidence in knowing that their future is secure.
Automated Investing Is Only For The Younger Crowd
Automated investing is investing.
No matter your age, financial situation, or career, you should always look for ways to invest more into the markets and build that retirement nest egg.
While it’s true that automated investing and robo-advisors have found a home amongst millennials and Gen Z, investors of all ages should look to capitalize on this hands-off, low-cost approach to investing.
Straightforward interfaces, easy setup processes, and a strong track record of profitability make this investing avenue an extremely viable investment class to hold for any portfolio.
Automated Investing Is Too Risky
Automated investing and robo-advisors are not inherently riskier than their human counterparts.
While some algorithmic traders admittedly take more risks, it’s because they are programmed to do so. They’re coded in such a way that their protocols require them to make a trade once specific conditions are met, so while riskier algorithms exist for investors looking to maximize returns, there are also safer algorithms that invest in blue-chip assets to protect your nest egg.
If anything, automated investing becomes less risky because of its capability to constantly monitor your portfolio and perform pre-programmed protocols like rebalancing and tax-loss harvesting. These protocols help manage risk and improve returns over time.
Tax-loss harvesting, for example, is done to offset taxable investment gains. Vanguard’s 2022 research shows an average benefit of 0.95% for investors who engage this practice. That is nearly equivalent to the 1% management fee common to many advisors. You’re essentially receiving professional-grade services for free. Talk about majorrreturns!
As markets change over time, so will your portfolio. Professionals call this phenomenon “drift”. Automated investors are equipped with the feature to restore your portfolio to your target asset allocation as often as you need. This saves you time and effort and protect you from overexposure to the markets.
You Can’t Trust Robo-Advisors
Some investors don’t trust algorithmic traders because they lack the human touch.
“A robo-advisor can’t understand my concerns and portfolio’s importance, how could I trust it with my money?” is a common argument. While investing naturally comes with the risk of losing money, a robo-advisor may just be as safe as a human - because you’ll always know what to expect from it.
On top of this, algorithmic traders are backed by some of the largest names in investment management - Charles Schwab, Fidelity, and Vanguard all have robo-advisors. Forward-thinking VC firms and angel investors are also pouring hundreds of millions of dollars into this industry to improve systems and reaffirm investors of its safety. In fact, some market research firms have forecasted the algorithmic trading market to grow 11% YoY to $18.8 billion by the end of 2024. The growth will be driven by the demand for quick order execution and lowered transaction costs.
You Can’t Personalize Or Customize Your Trading Plan
The last myth we wanted to discuss is a trading algorithm’s inability to personalize or customize a trading plan based on preferences and life circumstances.
This myth is true.
Robo-advisors generally cannot screen out certain investments. While you can invest in algorithms that only trade a specific asset, wide-basket algorithms often trade and invest in low-fee ETFs involved in a variety of industries - they’re unable to screen assets that may go against beliefs, like alcohol, tobacco, big tech, and fossil fuel.
Algorithmic trading platforms also cannot do complex financial planning that ties together your estate, taxes, insurance, and budgeting needs. Unless inputted by a financial planner, digital advisors also cannot provide legal advice or weigh in on your taxes and estate.
Despite their technical sophistication, robo-advisors need experienced professionals to advise investors to stay the course and answer any legal questions they may have.
While automated trading is powerful and robust, human advisors can empathize and connect with investors in a way that no computer ever could. Peccala understands this and offers a dedicated relationship manager for high-net-worth individuals to help get you onboarded, answer questions, and provide ongoing support in a seamless 1-to-1 investment experience.
Automated Investing Myths: Debunked
In the face of automation’s rapid improvement, you may have heard some myths and misconceptions floating around the internet. In any case, you should know that we hear your whisperings and look to clarify all the misunderstandings that three may be.
Sure, there are disadvantages when it comes to automated trading - but that doesn’t mean that this new tech is riskier. Sure, the maths are complicated; but companies like Peccala have made it a point to simplify this process as much as we can.
Don’t let these myths deter you from investing in the future.
If you have any more questions, feel free to send us an email at firstname.lastname@example.org.