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What is robo-investing, and should you do it?

Robo-investing (sometimes also called robo-advice) is a term you may have come across over the past year or 2. It’s a rather poor choice of name in my view, but it has stuck nonetheless, and so here we are.

Its proponents will tell you that robo-investing is a cheap, easy and effortless way of investing that can tailor a portfolio for your needs. Its detractors might call it fee-laden snake oil, and question whether it’s appropriate for its target market (individuals who want passive, hands-off investing).

So who’s right? Well, that’s what we’ll try and answer today.

What is robo-investing?

Robo-investing refers to an investment service that builds a custom-made portfolio of passive investments – usually exchange-traded funds (ETFs) – depending on a client’s age and risk profile. It has attracted the ‘robo’ name because of its hands-off approach. A platform offering robo-investing is typically digital and automated. It will not usually involve you speaking to a financial advisor or even a human.

So using ETFs, the platform will construct a portfolio for you.

If you’re a younger investor, a typical robo-portfolio will include a high allocation to ‘growth assets’. This is usually a mixture of ASX shares, international shares and perhaps property.

In contrast, if an older investor with a ‘less-risk’ profile came along, a robo-platform would instead construct a more ‘balanced’ portfolio, mixing shares with defensive assets like bonds, cash and perhaps gold.

In both cases, the robo-investor will do all of the work for you, reinvest dividends and perhaps rebalance the portfolio from time to time – all while you carry on living your life and not worrying about how your investments might be tracking. Some even offer ‘automated’ investment plans that might, for example, direct-debit you $20 a week to put towards your portfolio.

Sounds good, right?

Are robo-platforms a good idea?

I don’t have a problem with the concept of robo-investing, per se. I think it can be an easy and relatively fun way of investing your money, particularly if you aren’t partial to dabbling in the markets yourself. And I also think there’s a lot of merit for a ‘set-and-forget’ approach to investing that using a robo-advisor can foster.

However, not all robo-investing platforms are equal. Some might charge you usurious fees. A 1% or even 0.5% fee might sound cheap, but it adds up to a lot over time and can prove rather expensive seeing as you can always just invest in individual ETFs yourself.

Foolish takeaway

If the concept of robo-investing appeals to you, then, by all means, go for broke and run with it. But make sure you shop around for the best platforms that offer a reasonable price. There are many out there that simply charge too much for my liking.

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Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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