Robo-Investing is the Next Big Thing

Toy Robot

Image by Randy Chiu

It’s no big secret the financial services industry often takes advantage of retail investors.  High fees, poor performance and a lack of liquidity can be the cost of doing business with a commission-based financial advisor.  They have to get paid and that requires some costly products.

Finally, there is an alternative to hiring a financial planner or choosing your own investments.  For a small fee, you can try robo-investing, also known as automated investment advisory.  It is suddenly all the rage with millions of retail investors, especially Millenials, who seem to trust technology more than people.

Since programming an algorithm is cheaper than hiring lots of financial advisors, there can be significant savings for automated investors.  There can also be a big advantage to automating the entire investment process.  You can set it and forget it, instead of manually rebalancing your portfolio.  There are also automated features for very complex transactions, such as Differentiated Asset Location and Tax-Loss Harvesting.

Disclosure: This is not a paid post. I received no compensation from nor do I have any financial interest in companies profiled in the article. This information is provided objectively for the interest and entertainment of my readers.

The Key Players

Wealthfront – Wealthfront was established in 2011 and has over $2.6 billion under management.  They have quite an array of automated services including Direct Indexing, Differentiated Asset Location and Single Stock Diversification.  Customer assets are held in a brokerage account by Apex Clearing Corporation.  The management fees are .25%, with the first $10,000 managed for free.  The account minimum is $500, which is great for small investors.

Betterment – Betterment was founded in 2010 and has over $1.7 billion under management.  One nice feature of Betterment is individual goal setting.  This is something I did manually for my retirement funds, my house fund and college funds for my kids.  Management fees range from .15-.35%, in three tiers, depending on assets in the account.  There is no account minimum, but you will pay the highest tier fee (.35%) until you have at least $10,000 invested.

Schwab – Charles Schwab has been a champion of small investors for decades.  As one of the early discount brokers, they offered an alternative to pricey brokers on Wall Street, long before you could buy stocks online.  Their Intelligent Portfolios are available to investors with an account minimum of $5,000 and are free of commissions and advisory fees.  Managements fees are generated from the Schwab ETFs and third-party ETFs available in the portfolio.

FutureAdvisor – FutureAdvisor was founded in 2012 and has over $600 million under management.  They don’t hold your assets directly, instead you invest with Fidelity or TD Ameritrade and they manage your accounts.  For some odd reason, people over 68 years old aren’t eligible to invest with FutureAdvisor.  There is no account minimum for the free service, but the premium service requires at least $10,000.  The management fee is a flat .5% of assets.

My Predictions for Robo-Investing

  • Automated investing will continue to grow at a rapid pace.
  • Traditional investment firms will add automated features (like Schwab), in order to attract investors to their funds and ETFs.
  • Automated investing will begin to displace low-end investment advisors.
  • Younger investors will prefer automated investing to managed investing, the same way automatic transmissions have replaced manual gear boxes.

The Bottom Line

The bottom line is that good financial planning requires a lot more than picking a couple of investments and hoping they meet your goals.  If you lack the time and experience to do your own planning, robo-investing may be the solution.

“An investment in knowledge pays the best interest.”

– Benjamin Franklin

Recommended Reading

Barron’s – When Financial Advisors meet their Robo-Rivals
The Simple Dollar – Betterment vs. Wealthfront
Dough Roller – Betterment vs. Wealthfront

My Thoughts on Retirement Planning

I received an email from one of my readers asking me about my thoughts on retirement planning.

“What did you do successfully in your 20s to prepare for retirement?

What you would have done differently to ensure a better financial future?

What would be your ideal retirement plan?”

My ideal retirement plan would be to retire today, but that’s not realistic.  I will very likely retire a millionaire at age 67.  If I run into some money or develop a successful side-gig, I may retire sooner.  I would also love to cut back to 3-4 days a week and semi-retire in my 50s.  Since my house is almost paid off and I love living at the beach, I’ll likely stay here, even though California has high taxes.

What I did Right in my 20s

  • I started investing at age 21.
  • I saved consistently, even with a low income.
  • I did research and learned how to invest.
  • I bought newsletters and found mentors.
  • I wrote down goals and plans to achieve them.
  • I read books and listened to motivational tapes.
  • I followed a career path and chose a great profession.
  • I found side-gigs and invested the extra money.
  • I drove older cars and maintained them myself.
  • I saved for a house and will pay it off before retirement.

What I Would Change if I Could

  • I would have gotten my college degree in my 20s, instead of my 30s.
  • I would have demanded higher pay that was equal to my skills.
  • I carried credit card debt and took out a second to fix up my house.

The Bottom Line

The bottom line is that saving up for retirement isn’t as daunting as some people think.  As long as you start in your 20s, you will have plenty of time to save and invest.  If you wait until your 30s or later, the math becomes a lot more difficult.

“A whole generation of Americans will retire in poverty instead of prosperity, because they simply are not preparing for retirement now.”

– Scott Cook

Become a Millionaire in One Easy Step

I read an article today that discussed the status of the world’s growing number of millionaires.  This article shared a very enlightening statistic.

Millionaires invest on average 20% of their income.*

*Source: Yahoo Finance

Investing is the Key to Success

Hey You Millionaires

Image by Rance Rizzutto

So, it’s pretty much as simple as that.  If you invest a good part of your income, then within a number of decades you will likely become a millionaire.

Call me Captain Obvious, but “Everybody Knows That”.  The only question is, why aren’t people doing it?

Obviously, I have over-simplified the process of investing and accumulating wealth quite a bit.  I wanted to just concentrate on one simple facet of the entire process.  I want to understand why people fail to invest.  This has confused me for the 30 years I have been investing.  One reason I started this blog in 2007 was to encourage people to get started investing, yet it seems like a fool’s errand.

36% of people in the U.S. have nothing saved for retirement.*


Feedback is Requested

If you are one of the people who reads my blog and you don’t invest, I would love to hear the reasons why.  You can leave an anonymous comment, if you don’t want to be identified.  I am searching for creative ways to encourage new investors.

If you don’t currently invest, what is keeping you from doing it?

The Bottom Line

The bottom line is that investing is the most common way to become a millionaire in America.  That’s why there aren’t any posts about clipping coupons or making soap on my blog.  We need the magic of compounding in order to prosper.

“How many millionaires do you know who have become wealthy by investing in savings accounts? I rest my case.”

– Robert G. Allen

Recommended Reading

101 Centavos – Long-term Investing versus the Quick Buck
Don’t Quit your Day Job – What Type of Investors Perform Best?
Squirrelers – The Snowball Effect of Money

5 Critical Financial Mistakes

Nobody wants to make critical mistakes with their finances, but millions do it every day.  Fortunately, these 5 money mistakes are very easy to avoid.

1. Failing to Save

Number 5

Image by Steve Bowbrick

There is a reason Saving money is number one on this list.  Nobody wants to save money and they have a million excuses why they can’t.  Unfortunately, the alternative to saving money can be working your entire life and winding up broke.  If you never save money, you’ll never have any.  Save at least 10%.

2. Neglecting Income

Income is a key component of any financial plan but it is often neglected.  A higher income can lead to greater security and opportunity, provided some of it gets put away.  It is much easier to save, invest and create a secure future with an above-average income.  Work tirelessly to get paid what you deserve.

3. Failing to Invest

A savings account is considered an investment, but it’s a terrible investment for accumulating wealth.  The same can be said for CDs, money market and treasury bonds.  Any deposit yielding less than the rate of inflation is a guaranteed money loser.  The stock and real estate markets are scary and unpredictable.  You can win or lose big with these investment.  However, if you ever want to accumulate wealth, you have to choose investments that grow over the long term.

4. Failing to Insure

Risk is a nasty prospect and a danger to your future prosperity.  Most people underestimate their tolerance for risk, until they are facing a catastrophic loss.  Insurance is never a wise place to cut corners, especially if you have assets to protect.  Make sure you are insured properly, with all of the necessary policies and coverage, by a company you can trust to pay the claims.

5. Relinquishing Control

Never, ever, ever relinquish control of your financial assets.  Never let a financial advisor, investment firm or insurance company control your assets.  If you keep assets in your own accounts, you are considerably less likely to lose them.  The news and financial papers are littered with stories of people who lost everything to unscrupulous firms and advisors.  Millions of others are losing money every day to poor investments they can’t leave, such as annuities and whole life policies.

The Bottom Line

The bottom line is that managing your finances is profoundly easy.  The hardest part is getting started.  The thing that makes you successful is sticking with it.

“Learn from yesterday, live for today, hope for tomorrow.”

– Albert Einstein

Recommended Reading

Len Penzo – 5 Crazy Ideas that Resulted in Million Dollar Paydays
101 Centavos – Long-term Investing versus the Quick Buck
Don’t Quit Your Day Job – Should you Invest Actively or Passively?

Life is Getting a Lot More Expensive

I’m constantly telling my kids how I moved out at 19, worked my own way through college and saved up for and bought a house.  I am very proud of this and hoped to set an example for them to follow.  The really bad news for my kids and others in their 20s is that it’s getting a lot harder to live the American dream.

Student Debt is Stifling

The Graduates

Image by Sakeeb Sabakka

Anyone who is attending college or has recently graduated is painfully aware of the absurd cost.  Even local state college tuition is unaffordable to middle class students, without taking out some pretty hefty loans.

The total amount of student loans now exceeds $1.1 trillion and 66% of students with a 4-year degree now graduate with some student loans.  The average amount per student is now over $30,000.  Student debt has almost quadrupled in the past decade and this falls heaviest on minority and low-income students.

Wages are Stagnant

Wages have been essentially flat for the lowest 70% of workers for the past decade and have declined for the lowest 20%.  Wages are way up for CEOs and the other top 5% of wage earners.  Productivity is way up and corporations are making record profits.  But, they are taking care of their shareholders, instead of their employees.  This trend will continue, so employees need to look for high paying fields and entrepreneurial types may consider starting a business.

Source: Business Insider

Housing Prices are Up

Housing prices across the U.S. rose an average of 10.9% in 2013 and are headed higher this year.  In many parts of the country buying a house is nearly impossible for couples in their 20s.  Combined with student loan debt and stagnant wages, most couples will be lucky to be able to afford a house in their 30s.  Buying a house has always been the next obvious step for young couples.  But, many are starting to consider it an expensive hassle.  That’s a shame, because living in a paid off house makes retirement considerably more comfortable.

Source: Kiplinger

Median Savings is Zero

The typical American isn’t saving anything for the future right now, despite having plenty of income left over after paying their bills.  People are simply choosing to spend all of their discretionary income, instead of saving some.  This is a sad reality, where people are choosing to live paycheck-to-paycheck, instead of saving to get ahead.  Saving in your 20s is one of the keys to a prosperous future.  Waiting until your 30s makes it much more difficult to build a nest egg.

Source: Fox Business

Retirement is Expensive

Anyone who is 20 years old right now could need to save $7 million in order to retire and this would only allow an annual withdrawal of $43,600 in today’s dollars.  That is a mind-boggling amount of money to save, for retirement with a median income.  My original retirement goal in the 90s was to save a million dollars, but I have since decided to at least double that amount.  People in their 20s need to save a lot more and may not get to retire until well into their 70s.

Source: Yahoo Finance

The Bottom Line

The bottom line is that it’s getting much harder to earn a living wage and prosper in the working class.  Those without a plan may join the growing millions of working poor.  In order to succeed, you need work towards a higher income, manage finances wisely, save for the future and invest to outpace inflation.

“Success is liking yourself, liking what you do and liking how you do it.”

– Maya Angelou

Recommended Reading

101 Centavos – Invest in the Higher Cost of Food
Stumble Forward – 7 Things to Know Before you get a Mortgage
Barbara Friedberg – Positive and Negative Impacts of Globalization