Robo-Advisors Help You Stay Calm When Markets Aren’t

Advisors, Investing, Investing Strategy
Robo-Advisors Curb Emotional Reaction to Market Volatility

Keeping tabs on today’s market is a bit like watching a high-speed car chase. At times, a crash feels imminent.

In reality, there are plenty of economists who think that’s unlikely. But your portfolio may be experiencing what certainly feels like a crash: The average investor is down 6.1% for the year, according to app Openfolio, which created a benchmark from its community of 60,000 users. In fact, the app says some 93% of investors lost money in January 2016.

Though it might serve as some small comfort to know you’re not alone, what you really need is a way to curb panic, which is a root cause of most market volatility.

A murky definition of ‘lost’

Unless you’ve pulled money out of the market, you’re looking at paper losses only. Does that mean you’ve lost money? Sure, but you’ll only realize those losses if you need to sell investments.

If, on the other hand, you’re investing for a retirement that is 20, 30, even 40 years away, these market fluctuations are just a blip on a very long time horizon.

Enter the robo-advisor

You can understand paper losses. You can read this post and 10 others that offer similar advice. But when you check your 401(k), or turn on the news and hear words like “cataclysmic” and “recession,” it’s pretty easy to forget all of the above.

That’s why it’s helpful to have a watchdog for your money. This is one benefit of robo-advisors, a newish crop of companies that build and manage client portfolios via computer algorithm for a reasonable fee. Betterment and Wealthfront are two prime examples, and both of those companies came out at the top of our list of best robo-advisors.

Betterment, which currently boasts the most assets under management, charges a tiered fee: 0.35% on portfolios under $10,000; 0.25% on $10,000 to $99,999; and 0.15% on portfolios $100,000 and more. (Click here to get started with Betterment.)

Its biggest competitor, Wealthfront, charges a flat 0.25% and manages the first $10,000 invested completely free. (Click here to get started with Wealthfront.)

 


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For that cost — which amounts to around $225 per year on a $100,000 portfolio at Wealthfront and $150 per year at Betterment — your investments are selected and managed according to your goals and time horizon.

Both services give investors a streamlined questionnaire to identify risk tolerance and goals, then create a portfolio based on the answers. Automation takes it from there, and software makes the call on when to rebalance, not as part of a panicked reaction but to maintain your asset allocation (the percentage you hold in stocks, bonds and cash) when market fluctuations move it out of line.

In addition, both companies — as well as many of the other robo-advisors — offer daily tax-loss harvesting on all taxable accounts.

A barrier between your emotions and your money

With a robo-advisor, you’re also buying something that over the long term may be even more valuable than investment management, and that’s an emotional gut check. When you invest through a robo-advisor, you’re less likely to tinker with your investments during market fluctuations. You know you have a solid plan, and you’re more likely to stick to it.

Will you still experience losses with a robo-advisor on your side? Absolutely. These companies don’t claim to beat the market, nor should they. They almost always invest in low-cost exchange-traded funds (ETFs), which track an index like the S&P 500. That means their returns should closely mirror that benchmark — and as you no doubt know, that benchmark goes up and down.

But the value of protecting you from yourself is substantial. Take the 2008 recession as an example: Investors who pulled their money out — frequently due to panic — and stood on the sidelines between the end of 2008 or the beginning of 2009 and March 2010 lost an average of nearly 7%, according to Fidelity. Those who stuck it out emerged with an average account balance increase of nearly 22%.

If a robo-advisor can help you remain calm during market volatility — and reap the eventual profits of doing so — the service is more than worth the cost.

Arielle O’Shea is a staff writer at NerdWallet, a personal finance website. Email: aoshea@nerdwallet.com. Twitter: @arioshea.


Image via iStock.