We’re all just trying to make more money.
Admittedly, there isn’t anything horribly wrong with robo-advisors; we’re all busy people and robo-advisors have been doing a good job putting our funds to work without us having to spend precious hours scrutinizing reports and analyzing companies.
Still, we get news articles and websites bombarding us with eye-watering headlines about multi-bagger stocks which have gone up in value tremendously. Really makes you wonder if your money can possibly go further and give you better returns.
A close competitor to robo-investing would clearly be individual stock-picking. The concept is simple; buy and own stocks of emerging companies and profit from the subsequent increase in share prices. A truly buy-low, sell-high concept.
Caveats you say? Of course there are. Before that, let’s do a quick dive into the two different methods to understand the territory better.
Robo-advisors are basically intermediaries which utilize A.I to provide a wide range of investment portfolios to suit retail investors. Most products tend to consist of a mix of money market funds, unit trusts, and ETFs to cater to different risk profiles, appetites, and sector preferences.
Most robo-advisors also use algorithms to allocate, manage and optimize funds catered for investment, which helps them offer their products to a wider market, and keep prices low as well.
Robo-advisors generally earn from charging annual fees for usage of their investment platforms, and are deducted based on the total amount the customer invests with them, usually in the ballpark of 0.05% to 0.5%.
Compared to the robo approach, individual stock-picking is much more risky not only due to it’s weightage on a particular company but also because the investor making the call needs to understand the fundamentals of the chosen stock along with an awareness of the industry it is operating in.
The potential return on investment is also much greater due to the concentration effect. Investors desiring more control over their investments, also get to sit in the driver’s seat, picking and choosing which stock they feel has the most promise to perform.
You can also expect to pay potential fees such as brokerage and maintenance fees. These are to cover the services performed by the brokerage firm such as administering, transacting, and holding your shares for you.
Pros And Cons
With all the above mentioned points, here’s a summary of the good and bad points of each approach.
|Most have no minimum sum to start||Concentrated holdings|
|Relatively less time consuming||Potentially higher returns|
|Wide range of portfolios available||Allocation up to individual|
|Generally more diversified||Wide range of counters available|
|Relatively poorer returns||Much higher risk|
|No control over investments||Time-consuming to research and monitor|
Still think you’re up to the challenge? The lure of huge capital gains can be undeniably strong indeed. However, you should at least set aside time to read up and understand a company’s business model deeper before committing to individual stock investing.
Understanding financial valuation metrics such as PE, PS, and ROE is important as well to get a sensing of the pricing you are paying for a stock. As is building up a personal discipline to stick to an investment thesis. Ultimately, the onus is on you to make the decisions.
It can get pretty overwhelming leaping from robos to stocks overnight. A gentler approach is to transition your cash over to promising stocks in small portions instead. I’ve listed some online brokers which offer little to no brokerage fees to start you off;
Another perspective is that robos can value-add to your portfolio by offering convenience and versatility. Although an investor can DIY, he or she might not have the time to do so constantly, and might want to make use of the diversification, management, and research done by robos to invest.
Because we all have our own lives to lead, not everyone wants to or should spend precious hours on research for individual stocks. Sometimes the benefits of working with robos is more than just a financial one.