How to Achieve Long-Term Financial Goals with Automated Investing

If you’ve searched online for information about investments, then you might have read about automated investing or robo-investing, as it’s sometimes called. Automation has simplified a lot of things about how we manage our money, and for some of us, automated investing is a more affordable option than paying a financial advisor or wealth management company.

We want you to have the most up-to-date information about investing and financial management. In this article, we’ll explain automated investing, how it works, how you can get started, and give you our best tips for using automation to help you achieve the financial goals that are important to you.

What is Automated Investing?

Automated investing is a type of investing that uses computer algorithms to manage some aspects of your investment portfolio. The automation in question may encompass a wide range of features and functions. 
For example, an automated investing tool might only be responsible for making passive transfers and helping you save money. An advanced tool might be used to manage an entire portfolio without any human interaction at all.

Most people who use automated investing fall somewhere in the middle - relying on a robo-advisor to gather information about potential investments, evaluate their asset allocation, and help them streamline and manage their investments.

Keep in mind that there are several types of automated investing, including individual, brokerage, and robo-advisors.

How Does Automated Investing Work?

Automated investing might seem complicated, so let’s break it down so you can understand how it works.

Automated Investing in Personal Finance

The simplest form of automated investing is in the form of tools you may use through your credit union or bank. These tools are most commonly used to automate savings and investments. For example, you might use a tool that allows you to direct 5% of your monthly income to a linked investment account.

Another option would be a tool that allows you to set up automated payments and pay all your bills, then direct whatever money is left in your account to your investment account. In either case, you’d be using automation to help you save money and invest it for your short-term and long-term financial goals.

Automated Brokerage Tools

The middle tier of automated investment comes in the form of brokerage tools. These tools work behind the scenes to help a brokerage’s clients manage their portfolios. Here are a few examples of how the algorithms could help an investor:

1. The investor chooses high and low boundaries for a stock. You might purchase a stock for $100 a share and tell the brokerage you want to sell if it goes above or below your boundaries. The automated investment tool will monitor the prices and make the sale on your behalf.
2. Another way automation can help manage risk around a target date for retirement is to rebalance your portfolio to reduce risk as you age. The same type of automation can be applied to target dates for short-term goals such as buying a house.
3. Automation is sometimes used to help investors mitigate their tax burden. Selling before the end of the tax year, for example, may be advantageous in some circumstances.

It’s common for a mutual fund and ETFs to use brokerage automation to keep their funds balanced around whichever index they’re using as a benchmark. The biggest benefit of working with a brokerage is that you’ll get human interaction when needed, along with personalized investment advice for each financial goal.

Robo-Advisors

Robo-advisors are consumer-facing tools that can accomplish some of the same things that brokerage automation can. The main difference is that there’s no human financial advisor, which means that someone who uses a robo-advisor may need to keep certain investments out of the mix to allow for the human touch. Think of a robo-advisor as a fully automated type of investment management.

In most cases, a robo-advisor will ask a new user an array of questions to determine what their long-term goals are, how much tolerance for risk they have, and what kind of returns they want. It then uses the data it collects to create a smart portfolio for the user. The charge to use a robo-advisor is usually a percentage of the assets under management. You should expect to pay between 0.25% and 0.5% of AUM, as compared to between 1% and 2% for a brokerage.

How to Use Automated Investing to Achieve Long-Term Financial Goals

Here are some of the specific ways you can use automated investing for your portfolio management to turn your financial dreams into reality.

Enroll in an Employer-Sponsored Retirement Plan

Employer-sponsored retirement plans such as 401(k)s or IRAs offer one of the simplest ways to automate your investments. You can allocate a percentage of your pay to go into your account each pay period. In most cases, employee plan contributions are made on a pre-tax basis, which can help you save money on your taxes.

Many employers have brokerage firms to manage their employees’ retirement accounts, which means you may qualify to get free or low-cost financial advice to help you come up with an investment strategy. There’s also the possibility to get employer matching funds.

Use a Robo-Advisor

If you want help managing your portfolio without paying high brokerage fees, a robo-advisor may be your best bet. It’s like having a digital advisor on call 24 hours a day. Your robo advisor can help you find investment options and grow your investments to pursue any investment goal you choose.

Some robo-advisors to consider include the following:

• Betterment gives you access to expert-built portfolios and automation tools to balance your risk and asset allocation and reinvest dividends if that’s part of your strategy. There’s a $10 minimum to start investing and a 0.25% annual fee.
• Wealthfront is a savings and investment tool that pays 5% APY on cash deposits. It offers mechanisms for short-term and long-term goals, including bond ladders and automated investing. There’s a $500 minimum balance requirement and an annual advisory fee of 0.25%.
• Ellevest has a robo-advisor that’s designed to help women build wealth. It offers automated investment advice based on your goals, taking into account that women tend to earn less than men. You can invest in ETFs and mutual funds that help advance women. The cost is $12 per month and there’s no minimum account balance.

This is just a small sample of the robo-advisors that are available to you. 

Use a Micro-Investing App

Micro-investing apps can do a lot to help you automate your savings. They work by allowing users to round up purchases and put the rounded-up amount into an investment account. For example, if you paid $4.25 for a latte, a micro-investing app would round up to $5 and put $0.75 into your investment account. Those small contributions add up over time.

Some popular micro-investing apps to try include Acorns and Stash, both of which allow you to round up purchases and put the money into an investment account. 

Reinvest Your Dividends

One of the best ways we know to take advantage of compound growth is to roll the money you earn from your investments back into your portfolio. 

With an automated brokerage tool or robo-advisor, you can create a rule to take dividends and reinvest them in the same company. This tactic is a way to keep your money continuously working for you.

What Are Some Common Mistakes to Avoid with Automated Investing?

Here are some things you should know about automated investing, so you can avoid making mistakes.

• Not understanding the automated investment tools you’re using. This is a common mistake. While you can count on automation to help you streamline the investing process, you shouldn’t go into it without some basic knowledge about what the automation is doing and how it can impact your portfolio.
• Not checking out the fee structure before you fund your account. While robo-advisors are often less expensive than brokerage accounts, that doesn’t mean that there aren’t tools out there with high prices. Make sure you understand how the management fee structure works and when fees will be charged.
• Not monitoring your portfolio. Even if the algorithm is working well, your circumstances and personal risk tolerance may change. You don’t want to overreact to market fluctuations, but you should make it a habit to review your portfolio regularly.
• Ignoring your settings and instructions. You don’t need to be fiddling with them all the time, but you also shouldn’t overlook what’s going in with your portfolio or in the market. If you’re wondering if automated investing adjusts to changes in the market or personal goals, it can–but you have a part to play!
• Not being informed on the potential risks of automated investing. You can set parameters and answer questions, but we’re not yet in a place where automated investing can replace the human touch. You’ll need to keep your eyes on your portfolio. You may also have less flexibility with a robo-advisor than you would if you worked with a human advisor.

These risks aren’t insurmountable, but they illustrate why it’s important to review your portfolio and settings regularly to make sure you're on track to meet your long-term financial goals. Also, keep in mind that your investments are not insured by the National Credit Union Administration.

Explore Automated Investing with Leaders Credit Union

Automated investing can eliminate a lot of the guesswork and stress. It makes it easier to leave emotion out of investment decisions, keep your portfolio balanced, and keep your long-term goals in sight.

Need help with your investments? The Guided Wealth Portfolio from Leaders Credit Union offers the best of both worlds: personalized investment advice with 24/7 access to your portfolio and automation tools. Additionally, you can download and use our free Investing 101 Guide to gain deeper insights and strategies for your investment journey.