Dear Lifehacker,I keep hearing about automated investment services likeBettermentandWealthfront.
They seem great and the easiest way to invest.
But are these so-called robo-advisors better than the DIY approach?
In addition toBettermentandWealthfront, there areat least a dozenother similar firms competing for your investing business.
Lets take a look at their services to find out whether one of them is for you.
What Robo-Advisors Offer
Robo-advisors bill themselves as a smarter and easier way to invest.
They also regularly rebalance your portfolio for you.
Its the definition of set and forget.
(Whether you invest with a robo-advisor or DIY, those funds fees would still exist.)
And, as weve discussed before, lower fees meangreater performancecompared to higher-fee, actively managed funds.
Tax-efficient investing:Several of these companies also offer whats calledtax-loss harvesting.
You might be required to have a high minimum account balance, however, to get that service.
The Cons of Robo-Advisors
There are limitations and downsides to these services as well.
For example, my husbands retirement account is with the government employees Thrift Savings Plan (TSP).
This can skew and unbalance your entire portfolio.
(FutureAdvisor does work around your 401(k) assets, however.)
If you want tax planning, budgeting, and other financial planning, youll need to look elsewhere.
Both the average investor and the robo-advisors portolios returned 4.2%, while Hedgeable returned 7.4%.
For comparison, the Vanguard 2050 target date fundreturned 7.2% last year.
The robo-advisors websites will show you comparisons between their portfolios versus industry benchmarks, like the Betterment chart above.
Robo-Advisors vs.
Managing Your Investments Yourself
Finally, we get to the heart of your question.
The pros and cons above might help you make your decision, but everyones a little different.
An alternative to robo-advisors, however, is a target date fund.
Target date, a.k.a.
lifecycle funds,automatically rebalance every yearbased on the year you think youll need the money.
So you would get a more customized selection of investments from the robo-advisor than the target date fund.
If your investments are with Vanguard:Vanguard recently launched apersonal advisor servicesfeature that rivals that of robo-advisors.
Pick a few index funds and rebalance every year.
Its not as simple as using a robo-advisor, but it allows me to really fine-tune my investments.
And you might learn along the way.
