For a long time, investing money seemed out of reach for the average person. Even today, many assume that one needs thousands of dollars to begin their investment journey. Thankfully, that’s no longer the case, courtesy of online investment services and robo-advisors!

What are robo-advisors?

Robo-advisors are online automated investment advisors (such as Acorns or Betterment). Their exact capabilities and duties vary per platform. Still, a robo-advisor will generally automatically manage the money you provide it with. Once it places your money into an ETF (Exchange-traded fund), your funds will be instantly diversified amongst all the stocks in that particular ETF. Most robo-advisors offer multiple ETF portfolios for you to choose from, which may differ by:

• Risk (the overall volatility of the stocks contained within the ETF)
• Purpose (e.g., retirement, savings, or cash flow)
• Social causes (e.g., sustainable energy)

The exact options available will largely depend on the robo-advisor platform you decide to use. However, it’s important to note that you can only choose the ETF: you can’t select the individual stocks! This differs from alternative investment methods, which often give you precise control over your investments. Still, robo-advisors do all the work for you. They don’t require much beginning capital, making them ideal for those with limited investing experience.

The “Hands-On” Approach

If the idea of using a robo-advisor doesn’t sound appealing to you, don’t worry. There are other options available that allow you to control exactly where your money goes. True, higher-end investment opportunities like AcreTrader or  First National Realty Partners may require a large upfront deposit. However, many online services allow you to begin investing for as little as $5!

How It Works

Services that allow you to trade stocks (like Robinhood) will enable you to invest even small amounts of money. For $10, you’ll be able to purchase entire shares of some stocks. However, some stocks cost hundreds of dollars. Services like Robinhood allow you to buy partial shares, making it possible to invest in major companies despite not being able to afford total shares!

Many of these services allow you to purchase ETFs and crypto as well. Similarly, you’ll be able to buy percentages if you can’t afford the entire investment. These services are an excellent way to diversify your portfolio by yourself, but the downside is you’ll need to know what to invest in. Managing a successful portfolio on your own will be more time-consuming than using a robo-advisor. Still, if done correctly, it could also be more lucrative!

Costs and Fees

Most platforms will require payment at some point. Although commission-free trading is common online, there are still a variety of costs you could incur. Here are a few of the costs to consider when selecting a trading platform:

• Monthly membership fees
• Maintenance fees
• Commission fees
• Regulatory transaction fees
• Trading activity fees
• ADR (American Depositary Receipt) fees

Setting Realistic Expectations

Although it is certainly possible to become rich overnight, this is unlikely to become a reality for most people. Doing so would require making hazardous investments, a lot of luck, and perfect timing. As such, you should set realistic expectations for your investing endeavors.

Fortunately, that doesn’t mean investing is a waste of time. Quite the contrary: you can generate high returns over time! Many people simply place their money into savings accounts, but these accounts offer a very low APY (Annual Percentage Yield) and can quickly be outpaced by inflation. Let’s take a quick look at how a savings (X%APY) would perform over 10 years.

Savings Account

Initial investment: $10,000

APY: 0.13%

Balance after ten years: $10,130.85

As you can see, the return will be abysmal with a savings account, even after a decade! On top of that, inflation rates generally reduce your return’s value by 2-3% each year. Although you will technically have more money, your purchasing power will be reduced! Of course, this is better than leaving your money in a non-interest earning account, but it’s not the best option. 

Next, let’s compare the same capital ($10,000 for ten years) invested in the stock market. Generally, the stock market has a 10-11% return, averaging a 7% APY after adjusting for inflation.

Stock Market

Initial investment: $10,000

APY: 7% 

Balance after ten years: 20,136.16

As you can see, the stock market is a much better investment opportunity than simply using a savings account! However, just because—based on historical data—your funds should grow doesn’t mean your funds will grow. Unfortunately, loss is part of investing, so it’s essential to factor risk into your investments.

Determining the Appropriate Risk Level

Online robo-advisors will generally allow you to choose a portfolio based on the “risk factor.” Investing in individual stocks means you’ll have to assess the risk factor yourself. Essentially, the “risk factor” equates to volatility. Investments with higher volatility offer greater returns but also increase the chance of losing your money. Investments with lower volatility offer lesser returns but are less likely to depreciate in value.

Generally speaking, high-risk investments are suitable for younger investors with time to recover from losses. Low-risk investments are the preferred option for older investors who won’t have time to recover from losses.

Investing for Your Future

The best time to start investing was yesterday; the second-best time to start investing is today! However, you should never begin investing without doing some research first. Compare different options, analyze the risks, and weigh the potential outcomes before taking your first step to a better financial future.