Automated investing, demystified: what is it and how does it work?

Navigating the world of investments can feel a bit overwhelming at times. That's where automated investing might come in — it’s almost like having your own personal finance guru (but without the fancy suits and intimidating jargon).

In this article, we're diving headfirst into the world of automated investing: what it is, how it works, and why it might be the game-changer you've been waiting for in your financial journey. 

The bank you'll love

✓ 100% mobile ✓ No hidden fees ✓ No paperwork ✓ Free virtual Mastercard ✓ Free ATM withdrawals

Get started (new tab)

Automated investing, also known as robo-advising, is a modern approach to managing investments. It uses algorithms and computer programs instead of human financial advisors (or managing your investment portfolio on your own). If you're a beginner investor, it can make your entry into the financial market easier.

With automated investing, you input your financial goals, risk tolerance, and other preferences into an online platform or app, and the system uses this information to create and manage a diversified investment portfolio for you. These platforms typically invest your money in a mix of exchange-traded funds (ETFs) or mutual funds that align with your goals and risk profile.

Automated investing offers convenience, low fees, and a hands-off approach to investment management, making it accessible to investors of all experience levels — but that doesn't mean it comes without risks.

Like any investment strategy, such as stocks or bonds, it’s essential to carefully weigh the pros and cons and to choose an approach that aligns with your financial goals and preferences.

Automated investing has some clear pros: 

• Convenience: Automated investing platforms handle everything, from portfolio construction to rebalancing, saving you time and effort.
• Lower costs: Robo-advisors typically charge lower fees than traditional financial advisors, which makes investing more affordable.
• Diversification: Automated investing services often build diversified investment portfolios using a mix of asset classes, reducing risk through market exposure.
• Accessibility: Automated investing platforms are user-friendly and accessible to investors of all experience levels, so anyone can start investing quickly.
• Personalization: Many robo-advisors offer personalized investment strategies based on your financial goals, risk tolerance, and time horizon.

Even though the pros are appealing, it's important to consider the cons, too:

• Limited human interaction: While robo-advisors provide automated portfolio management, they lack traditional financial advisors' personalized advice and human touch.
• One-size-fits-all approach: Some automated investing platforms may offer limited customization options, resulting in a more standardized investment approach that may not fully align with your individual preferences.
• Market volatility: Like all investments, portfolios managed by robo-advisors are subject to market fluctuations, and there's no guarantee of returns.
• Complexity: While automated investing platforms aim to simplify the investment process, some investors may find the algorithms and strategies used by these platforms complicated and hard to understand.
• Limited asset classes: Some robo-advisors may have a limited selection of investment options compared to what’s available through traditional investment advisors. This can particularly be the case with alternative or niche asset classes.

All that said, there’s more than one type of automated investment. Let’s take a closer look.

Banking basics

Banking jargon can be confusing—but it doesn't have to be. Find simple explanations to popular banking terms.

Learn the basics

There are several types of automated investing strategies and platforms available to investors:

• Robo-advisors: Robo-advisors are online platforms that use algorithms and computer programs to create and manage investment portfolios for clients. They typically offer a range of diversified portfolios based on factors like risk tolerance, investment goals, and time horizon.
• Target-date funds: These are mutual funds or ETFs designed to automatically adjust their asset allocation over time based on a target retirement date. As the target date approaches, the fund gradually shifts its holdings from more aggressive investments, like stocks, to more conservative ones, like bonds, to reduce risk.
• Socially Responsible Investing (SRI) platforms: SRI platforms use automated investing techniques to build portfolios that align with environmental, social, and governance (ESG) criteria. These platforms allow investors to support companies and industries promoting values they believe in while also seeking financial returns.
• Algorithmic trading platforms: These platforms use complex mathematical algorithms to analyze market data and execute trades automatically. Professional traders and institutional investors often use them to take advantage of short-term market fluctuations.
• Hybrid robo-advisors: Some platforms combine automated investment management with access to human financial advisors. These hybrid models offer automated investing benefits and personalized human advice when needed.
• Automatic investment plans: These plans allow investors to set up recurring contributions to their investment accounts, which are automatically invested in a predetermined portfolio or asset allocation. This approach helps investors maintain discipline and consistency in their investing habits.

These are just a few examples of automated investing strategies and platforms available in the market. Each type offers its own features, benefits, and considerations — so choose the approach that best aligns with your financial goals and preferences.

So, you're ready to start your automated investment journey? With so many options out there, knowing what to look for when choosing an automated investment platform is crucial. 

From fees and investment options to user experience and customer support, finding the right platform can make all the difference in achieving your financial goals. Here are some popular platforms to consider: 

Note that fees, minimum investment amounts, and features may vary, and it's important to do thorough research and review the latest information provided by each platform before making investment decisions.

Just because your investment portfolio is automated, doesn't mean you don't have to keep an eye on it. Regular review is crucial. 

While automated platforms handle daily management, it’s wise to check periodically and make sure your portfolio still matches your objectives. Rebalancing is also essential. Market fluctuations can alter your asset allocation, and you may need to make adjustments to maintain your target mix.

Additionally, be flexible with your goals — if you go through major life events, you might have to reassess your investment strategy. You also have to understand the tax implications of your portfolio, so you can optimize returns and minimize liabilities.

Lastly, seeking guidance when needed ensures you're making the most of your automated investing experience. Customer support and financial advisors associated with your platform can offer personalized advice and address any concerns you may have, which supports the long-term success of your investment strategy.

“The more you learn, the more confident you'll be as an investor,” explains Guido Lonetti, Head of Product Investments at N26. “At the beginning, investing can be intimidating. There are tons of terminology to learn: ETFs, stocks, dividends. The most important step is to overcome analysis paralysis,” he concludes, referring to the feeling of being frozen when so many options are available. 

By keeping these points in mind, you can manage your automated portfolio effectively and ensure it continues to work toward your financial goals over time.

N26 offers a simplified and stress-free way of managing your money. Gain a deep understanding of your spending habits with Insights and get a monthly snapshot of your financial health with your Monthly Wrap-Up, helping you to stay on budget. Plus, you can easily start setting aside money with Spaces to help you reach your short and long-term financial goals. Find the right account for you.

These statements do not constitute investment advice relating to any financial instrument. Financial instruments can be subject to high fluctuations in value. A decline in value or a complete loss of the money invested is possible at any time.