I always thought investing had to be complicated, but reading ‘Millionaire Teacher’ showed me how to put it on auto-pilot

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The author, Alexis Rhiannon. Courtesy Alexis Rhiannon

For the majority of my financial life, I’ve been under the delusion that when it comes to investing, I either need to go it alone, or put my entire fate into the hands of a financial advisor. But, as it turns out, there’s a Goldilocks-esque option sitting smack-dab in the middle that I’d never considered: intelligent investment firms.

Better known as robo-advisors, these low-cost companies leave investment decisions to the cold rationality of computers instead of opening them up to human error.

I learned about them in Chapter 7 of Andrew Hallam’s book, “Millionaire Teacher: The Nine Rules of Wealth You Should Have Learned in School.” I’ve been working my way back through the text, mining it for hidden gems I missed the first time around, and in this particular chapter, I hit the motherlode.

What is a robo-advisor?

An intelligent investment firm, or robo-advisor, manages your portfolio with as little human intervention as possible, protecting your money from your own self-sabotaging instincts, along with those of your money manager. The company puts decisions into the hands of computer algorithms, which are much more resilient in the face of volatility and uncertainty than we short-sighted humans.

The way I think of it, it’s a bit like sending a robot grocery shopping. While you might get into the aisles and abandon your carefully-tailored meal plan at the first sign of a stomach rumble, your robot companion will never reach for junk food or tabloids at the register. It knows what’s good for you, and will stick to the plan you agreed upon together, in your stronger moments — dutifully returning home with spinach and quinoa no matter how much you’re craving a pint of ice cream.

How does this type of investing work?

Hallam uses Vanguard’s Target Retirement Funds to outline how intelligent investing works (though robo-advisors aren’t quite the same thing).

At the time of his writing, Hallam’s wife owned VTWNX, a bundle of Vanguard index funds that forms a complete, ready-made portfolio for anyone with a target retirement date of 2020. It contains five index funds running the gamut from domestic, to international, to stocks, to bonds, giving her exposure to the entire market.

In addition, Vanguard automatically rebalanced the fund every year, increasing the ratio of bonds to stocks as Hallam’s wife neared retirement without her having to lift a finger. And Vanguard did all this for a fee of just 0.14% per year, making it one of the cheapest all-in-one portfolios in the world.

Robo-advisors do something similar, investing your cash into an algorithmically-selected portfolio and adjusting it over time to help you reach your goals without exceeding your risk tolerance.

Why would I want this?

Great question, honestly, because not everyone does. Personally, I’ve leaned more toward the DIY approach, building, managing, and largely ignoring my portfolio according to Hallam’s advice. But not everyone has the desire (or the hard-headedness) to go it alone.

Hallam compares suffering idly through a plummeting stock market to sitting on a rock in a rainstorm. It’s perfectly natural to want to go inside to escape all that discomfort, but it’s not typically the best strategy. At least when it comes to the market. If you have the stubbornness to suffer through the bad weather, you’re likely to be in the right place at the right time when the sun comes back out. No storm lasts forever.

But if that insight is difficult to hang onto in the moment, robo-advisors are thrilled (or stoic, really — the whole point is that they feel nothing) to step in and sit on the rock in the rain for you. It’s essentially a prevention tool for the self-sabotaging instincts that a lot of us suffer from.

What are your options as far as robo-advisory firms?

In addition to the Vanguard Target Retirement Funds described above, which come with a wide range of target retirement dates, Hallam lists out a series of companies that offer the same services. Here are his top robo-advisor picks for American investors:

  • RW Investment Strategies
  • PlanVision
  • AssetBuilder
  • Betterment
  • Rebalance IRA
  • SigFig
  • Wealthfront

Each of the above companies has its own unique take, but all emphasise hands-off strategies with low fees, which should be compelling to the average investor.

Particularly when it comes to investing in index funds for retirement goals, inaction is typically the best policy. So if you’re the type of investor who’s constantly battling impulses to jump in or out of the market (and many of us are!), you might really benefit from handing the reins over to an intelligent investment firm. Your newly-relaxed jaw would certainly thank you.

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