Is a robo-adviser worth the risk?
If you are looking for an advisor to just build a portfolio and then manage it, a robo-advisor can be beneficial (especially if the alternative is doing it your self, assuming that you are not well versed in the markets). The primary risk with one is that it does not build a portfolio that accurately represents your needs and risk tolerance. Some firms base the number of questions they ask you on sign up based not on what is needed to get a good profile, but on how many before people decide that it is too much hassle and bail. That usually results in poorer profiles. Also a live advisor may be better at really getting at your risk tolerance. Many of day our risk tolerance is one thing but in reality we are not so risk tolerant.  Once the profile is built. The algorithms maintain your portfolio on a day by day basis. If rebalancing opportunities occur they take advantage of it.  The primary benefit of a robo-advisor is lower fees or smaller minimum account balances. The downside is the lack of human interaction and financial advise outside of putting together a portfolio. They've been around long enough now for there to be past performance figures you can google for. I think you'll find the results aren't very encouraging. I personally don't think there's a huge risk that the robots will lose all your money, but there's every reason to expect they aren't likely to perform better than traditional managers or beat the market. At the end of the day the robots are employing a lot of analysis and management techniques that traditional managers have been using, and since traditional managers use computers to do it efficiently there's not much gain IMO. Yes in theory labour is expensive so cutting it out is good, but in practise, in this case, the amount of money being managed is huge and the human cost is pretty insignificant. I personally don't believe that the reduced fees represent the cost of the human management, I think it's just marketing. There might be some risk that the robots can be 'gamed' but I doubt the potential is very great (your return might in theory be a fraction of a percent less over time because it's going on). The problem here is that the algorithms are functionally broadly known. No doubt every robo adviser has its own algorithms that in theory are the closely guarded secret, but in reality a broad swath of the functional behaviour will be understood by many people in the right circles, and that gives rise to predictability, and if you can predict investment/trading patterns you can make money from those patterns. That means humans making money (taking margin away) from the robots, or robots making money from other robots that are behind the curve. If robo advisers continue to take off I would expect them to under perform more and more.
Totally agree.   Autonomous cars can **increase margins** in the insurance industry since there will be fewer claims.   **for Geico - less administration and higher margins.  Buffet is probably ecstatic.**  Edit:  Not saying that this is in the best interests of the public, but if insurers can get away with it I'm sure they'll try. As a 22 year old planning for your financial life, it is obvious to say that saving as much as you can to invest for the long run is the smartest thing to do from a financial point of view.  In general, at this point, aged 22, you can take as much risk as you'll ever will. You're investing for the very long term (+30/+40 years). The downside of risk, the level of uncertainty on returns (positive or negative), is most significant on the short term (<5years). While the upside of risk, assuming you can expect higher returns the more risk you take, are most significant on the long term.  In short: for you're financial life, it's smart to save as much as you can and invest these savings with a lot of risk.  So, what is smart to invest in? The most important rule is to keep your investment costs as low as possible. Risk and returns are strongly related, however investment costs lower the returns, while you keep the risk. Be aware of the investment industry marketing fancy investment products. Most of them leave you with higher costs and lower returns. Research strongly suggests that an lowcost etf portfolio is our best choice. Personally, i disregard this new smart beta hype as a marketing effort from the financial industry. They charge more investment costs (that's a certain) and promise better returns because they are geniuses (hmmm...). No thanks. As suggested in other comments, I would go for an low cost (you shouldn't pay more than 0.2% per year) etf portfolio with a global diversification, with at least 90% in stocks. Actually that is what I've been doing for three years now (I'm 27 years old). "I don't think blanket answers are very helpful. You are asking the right question when you are young! You have a large number of investment options and Australia has the Superannuation system that you can extract significant tax value from. I've not attempted to grade these with regard to ""risk"", as different people will rate various things with different levels, depending on their experience and knowledge. Consider the following factors for you:-" If you think you can manage the risk and the spread is ultimately worth it to you, there's nothing stopping you. I know in the U.S., in CA specifically, you need to have $85,000 annual income or net worth over some threshold to be able to loan more than $2,500 via peer-to-peer loan investing.  I've had an account at prosper since around 2010, it does pretty well.  It's made my taxes a bit more complicated each year, but it's been profitable for me.  I wouldn't lever up on it though. My Prosper Experience My experience with Prosper has generally been positive.  My real motivation for starting the account was generating a dataset that I could analyze, here's some of that analysis. I started the account by trickling $100 /month in to buy four $25 loans.  Any payments received from these loans were used to buy more $25 loans.  I've kept my risk to an average of about A- (AA, A, B, C, D, E, HR are the grades); though the interest rates have reduced over time.  At this point, I have a few hundred loans outstanding in various stages of completion.  In calendar 2015 I had a monthly average of 0.75% of my loans charged-off and about 3% of loans at some stage of delinquency.   I receive about 5.5% of my principle value in receipts on average each month, including loan pay-offs and charge-offs.  Interest and other non-principle payments comprise just shy of 20% of my monthly receipts.  Prosper's 1% maintenance fee translates to about 8% of my monthly non-principle receipts.  It's all a pretty fine line, it wouldn't take many defaults to turn my annual return negative; though in 5 years it hasn't happened yet.  Considering only monthly charge-offs against monthly non-principle receipts I had two net negative months in 2015.  I made about a net 4.5% annual return on my average monthly outstanding principle for calendar 2015.  When I log in to my Prosper account it claims my return  is closer to 7.5% (I'm not sure how that number is calculated). The key is diversifying your risk just like a bank would.  I don't know how the other services function at a nuts and bolts level.  With prosper I choose which loans to fund which means I determine my risk level.  I assume the other services function similarly.   Regarding collection of charged-off loans.  I don't know how much real effort is expended by Prosper.  I've had a few notes sold for about 10% of the outstanding balance; and I don't know who they were sold to.  Comically, I have loan that's made more payments in collections than when it was in good standing.  There is definitely more to this than handing over $15,000 and receiving 6% on it. First--and I'm only repeating what has been said already--roboadvisors are a great way to avoid paying high MERs and still not have to do much yourself. The Canadian Couch Potato method is great IF you are disciplined and spend the time every few months to regularly re-balance your portfolio. However, any savings you gain in low MERs is going to very likely be lost if you aren't re-balancing or if you aren't patient and disciplined in your investing. For that reason, the Couch Potato way isn't appropriate for 97% of the general population in my opinion. But if you are reading this, you probably already aren't a member of the general population. For myself, life seems always too busy and I've got a kid on the way. I see a huge value in using a robo-advisor (or alternatively Tangerine) and saving time in my day. The next question, which robo-advisor is best? I did a bunch of research here and my conclusion is that they are all fairly similar. My final three came down to Wealthbar/Wealthsimple/NestWeatlh. Price structures vary, but minus a few dollars here or there, there isn't a lot of difference in costs. What made WealthSimple stick out was that they provide some options for US citizens that help me prevent tax headaches. They also got back to me by email with really detailed answers when I had questions, which was really appreciated. Their site and monthly updates are minimalist and intuitive to navigate. Great user experience all around (I do web design myself). My gut feeling is that they have their act together and will stick around as a company for a long while. It's a good question, I am amazed how few people ask this. To summarise: is it really worth paying substantial fees to arrange a generic investment though your high street bank? Almost certainly not. However, one caveat: You didn't mention what kind of fund(s) you want to invest in, or for how long. You also mention an “advice fee”. Are you actually getting financial advice – i.e. a personal recommendation relating to one or more specific investments, based on the investments' suitability for your circumstances – and are you content with the quality of that advice? If you are, it may be worth it. If they've advised you to choose this fund that has the potential to achieve your desired returns while matching the amount of risk you are willing to take, then the advice could be worth paying for. It entirely depends how much guidance you need. Or are you choosing your own fund anyway? It sounds to me like you have done some research on your own, you believe the building society adviser is “trying to sell” a fund and you aren't entirely convinced by their recommendation. If you are happy making your own investment decisions and are merely looking for a place to execute that trade, the deal you have described via your bank would almost certainly be poor value – and you're looking in the right places for an alternative. ~ ~ ~ On to the active-vs-passive fund debate: That AMC of 1.43% you mention would not be unreasonable for an actively managed fund that you strongly feel will outperform the market. However, you also mention ETFs (a passive type of fund) and believe that after charges they might offer at least as good net performance as many actively managed funds. Good point – although please note that many comparisons of this nature compare passives to all actively managed funds (the good and bad, including e.g. poorly managed life company funds). A better comparison would be to compare the fund managers you're considering vs. the benchmark – although obviously this is past performance and won't necessarily be repeated. At the crux of the matter is cost, of course. So if you're looking for low-cost funds, the cost of the platform is also significant. Therefore if you are comfortable going with a passive investment strategy, let's look at how much that might cost you on the platform you mentioned, Hargreaves Lansdown. Two of the most popular FTSE All-Share tracker funds among Hargreaves Lansdown clients are: (You'll notice they have slightly different performance btw. That's a funny thing with trackers. They all aim to track but have a slightly different way of trading to achieve it.) To hold either of these funds in a Hargreaves Lansdown account you'll also pay the 0.45% platform charge (this percentage tapers off for portolio values higher than £250,000 if you get that far). So in total to track the FTSE All Share with these funds through an HL account you would be paying: This gives you an indication of how much less you could pay to run a DIY portfolio based on passive funds. NB. Both the above are a 100% equities allocation with a large UK companies weighting, so won't suit a lower risk approach. You'll also end up invested indiscriminately in eg. mining, tobacco, oil companies, whoever's in the index – perhaps you'd prefer to be more selective. If you feel you need financial advice (with Nationwide) or portfolio management (with Nutmeg) you have to judge whether these services are worth the added charges. It sounds like you're not convinced! In which case, all the best with a low-cost passive funds strategy. One can never be too cautious when when choosing a financial adviser. For example, has the company your adviser claims to represent ever been sanctioned by the local financial authorities? Does your adviser reside in the country in which he purports to operate? Have you thoroughly researched his background?  It is also important to bear in mind what venues a company uses for advertising - if the company resorts to advertising by spamming, then their overall business practices are likely unethical and this could lead to trouble down the line.  Finally, one should also research how the company's clientele has been built up. Was it through word of mouth or was the client data acquired by other means? "For starters, the risk-free rate has nothing to do with stocks.  It would be independent of anything.  It pays out the same return in all states of nature.  The definition of a risk-free asset is that regardless of how the universe turns out, including a meteor striking the Earth killing everyone but the recipient, then the payout would happen exactly as planned.  One could imagine a computer still being on, connected to a power supply and printing a check.  Most people use the 90-day t-bill as the risk-free rate.  A beta greater than one implies it is more volatile than the market, not that it moves more perfectly. The CAPM should not be used for this.  Cryptocurrencies should not be used with this model because they have valuation dynamics related to the new issue of coins.  In other words, they have non-market price movements as well as market price movements. In general, you should not use the CAPM because it doesn't work empirically.  It is famous, but it is also wrong.  A scientific hypothesis that is not supported by the data is a bad idea.  My strong recommendation is that you read ""The Intelligent Investor,"" by Benjamin Graham.  It was last published in 1972, and it is still being printed.  I believe Warren Buffett wrote the current forward for it.  Always go where the data supports you and never anywhere else, no matter how elegant. Finally, unless you are doing this like a trip to Vegas, for fun and willing to take the losses, I would avoid cryptocurrencies because you don't know what you are doing yet.  It is obvious from the posting.  I have multiple decades working in every type of financial institution and at every level, bottom to top.  I also have a doctorate, and I am an incredible researcher.  I am professionally qualified in three different disciplines. If you want to learn how to do this, start with the ""Intelligent Investor.""  Get a basic book on accounting and learn basic accounting.  Pick up economics textbooks at least through ""Intermediate"" for both microeconomics and macroeconomics.  Get William Bolstad's book ""Introduction to Bayesian Statistics.""  You will need them for reasons that go very far beyond this post.  Trust me; you want to master that book.  Find a statistician and ask them to teach it to you as a special topics course.  It will help you as both either a Marine officer or a Naval officer.  Then after that pick up a copy of ""Security Analysis.""  Either the 1943 copy (yes it is in print) by Benjamin Graham if you feel good about accounting, or the 1987 copy by Cottle under the Graham/Dodd imprimatur.  Then, if you are still interested in cryptocurrencies and they will be blasé by then, then pick up an economics textbook on money.  If I were you, I would learn about Yap money, commodity money, and prison money first, then you might understand why a cryptocurrency may not be an investment for you." A CDIC-insured high-interest savings bank account is both safe and liquid (i.e. you can withdraw your money at any time.)  At present time, you could earn interest of ~1.35% per year, if you shop around. If you are willing to truly lock in for 2 years minimum, rates go up slightly, but perhaps not enough to warrant loss of liquidity. Look at GIC rates to get an idea. Any other investments – such as mutual funds, stocks, index funds, ETFs, etc. – are generally not consistent with your stated risk objective and time frame. Better returns are generally only possible if you accept the risk of loss of capital, or lock in for longer time periods. "In the UK there are Premium Bonds, http://www.nsandi.com/. In simple terms these get you a ""raffle ticket"" for each £1 you invest. Each month multiple tickets are drawn and they each win between £25 and £1m. Your capital does not go down but you aren't guaranteed to win. So you can't lose your money but there's potential to not make any either." "If your financial needs aren't complex, and mostly limited to portfolio management, consider looking into the newish thing called robo-advisers (proper term is ""Automated investing services"").  The difference is that robo-advisers use software to manage portfolios on a large scale, generating big economy of scale and therefore offering a much cheaper services than personal advisor would - and unless your financial needs are extremely complex, the state of the art of scaled up portfolio management is at the point that a human advisor really doesn't give you any value-add (and - as other answers noted - human advisor can easily bring in downsides such as conflict of interest and lack of fiduciary responsibility).  disclaimer: I indirectly derive my living from a company which derives a very small part of their income from a robo-adviser, therefore there's a possible small conflict of interest in my answer" I will attempt to answer three separate questions here: The standard answer is that an emergency fund should not be in an investment that can lose value.  The safest course of action is to put it in a savings account or other very low risk investment somewhere. This question becomes: can a reasonable and low risk investment in Sweden be comparable to or better than a low risk investment in Brazil? Inflation in Brazil has averaged a little less than 6% over the last 10 years with a recent spike up above 8%.  A cursory search indicates interest rates on savings accounts in Brazil are outpacing inflation so you might still expect a positive return on money in a savings account there. By contrast, Sweden's inflation rate has been around 1% over the last 10 years and has hovered around 0 or even deflation in recent years.  Swedish interest rates for savings accounts right now are very low, nearly 0%.  Putting money in a savings account in Sweden would likely hold its value or lose a slight amount of value. Based on this, you might be better off leaving your emergency fund invested in BRL in Brazil. The answer to this a little unclear.  The Brazilian stock market has been all over the place in the last 10 years, with a slight downard trend in recent years.  In comparison, Sweden's stock market has shown fairly consistent growth in spite of the big dip in 2008.  Given this, it seems like the fairest comparison would your current 13% ROI investment in Brazil vs. a fund or ETF that tracks the Swedish stock market index. If we assume a consistent 13% ROI on your investment in Brazil and a consistent inflation rate of 6%, your adjusted ROI there would be around 7% per year. The XACT OMS30 ETF that tracks the Swedish OMS 30 Index has a 10 year annualized return of 9.81%.  If you subtract 0.8% inflation, you get an adjusted ROI 9%. Based on this, Sweden may be a safer place for longer term, moderate risk investments right now. "If you read Joel Greenblatt's The Little Book That Beats the Market, he says: Owning two stocks eliminates 46% of the non market risk of owning just one stock.    This risk is reduced by 72% with 4 stocks, by 81% with 8 stocks, by 93% with 16 stocks, by 96% with 32 stocks, and by 99% with 500 stocks.  Conclusion: After purchasing 6-8 stocks, benefits of adding stocks to decrease risk are small.   Overall market risk won't be eliminated merely by adding more stocks.  And that's just specific stocks. So you're very right that allocating a 1% share to a specific type of fund is not going to offset your other funds by much. You are correct that you can emulate the lifecycle fund by simply buying all the underlying funds, but there are two caveats: Generally, these funds are supposed to be cheaper than buying the separate funds individually. Check over your math and make sure everything is in order. Call the fund manager and tell him about your findings and see what they have to say. If you are going to emulate the lifecycle fund, be sure to stay on top of rebalancing. One advantage of buying the actual fund is that the portfolio distributions are managed for you, so if you're going to buy separate ETFs, make sure you're rebalancing. As for whether you need all those funds, my answer is a definite no. Consider Mark Cuban's blog post Wall Street's new lie to Main Street - Asset Allocation. Although there are some highly questionable points in the article, one portion is indisputably clear:  Let me translate this all for you. “I want you to invest 5pct in cash and the rest in 10 different funds about which you know absolutely nothing. I want you to make this investment knowing that even if there were 128 hours in a day and you had a year long vacation, you could not possibly begin to understand all of these products. In fact, I don’t understand them either, but because I know it sounds good and everyone is making the same kind of recommendations, we all can pretend we are smart and going to make a lot of money. Until we don’t"" Standard theory says that you want to invest in low-cost funds (like those provided by Vanguard), and you want to have enough variety to protect against risk. Although I can't give a specific allocation recommendation because I don't know your personal circumstances, you should ideally have some in US Equities, US Fixed Income, International Equities, Commodities, of varying sizes to have adequate diversification ""as defined by theory."" You can either do your own research to establish a distribution, or speak to an investment advisor to get help on what your target allocation should be." "First of all, congratulations on being in an incredible financial position.  you have done well. So let's look at the investment side first.   If you put 400,000 in a decent index fund at an average 8% growth, and add 75,000 every year, in 10 years you'll have about $1.95 Million, $800k of which is capital gain (more or less due to market risk, of course) - or $560k after 30% tax.  If you instead put it in the whole life policy at 1.7% you'll have about $1.3 Million, $133k of which is tax-free capital gain. So the insurance is costing you $430K in opportunity cost, since you could have done something different with the money for more return.   The fund you mentioned (Vanguard Wellington) has a 10-year annualized growth of 7.13%.  At that growth rate, the opportunity cost is $350k.  Even with a portfolio with a more conservative 5% growth rate, the opportunity cost is $178k Now the life insurance.  Life insurance is a highly personal product, but I ran a quick quote for a 65-year old male in good health and got a premium of $11,000 per year for a $2M 10-year term policy.  So the same amount of term life insurance costs only $110,000.  Much less than the $430k in opportunity cost that the whole life would cost you. In addition, you have a mortgage that's costing you about $28K per year now (3.5% of 800,000). Why would you ""invest"" in a 1.7% insurance policy when you are paying a ""low"" 3.5% mortgage? I would take as much cash as you are comfortable with and pay down the mortgage as much as possible, and get it paid off quickly. Then you don't need life insurance.  Then you can do whatever you want.  Retire early, invest and give like crazy, travel the world, whatever.   I see no compelling reason to have life insurance at all, let alone life insurance wrapped in a bad investment vehicle." Googling vanguard target asset allocation led me to this page on the Bogleheads wiki which has detailed breakdowns of the Target Retirement funds; that page in turn has a link to this Vanguard PDF which goes into a good level of detail on the construction of these funds' portfolios. I excerpt: (To the question of why so much weight in equities:) In our view, two important considerations justify an expectation of an   equity risk premium. The first is the historical record: In the past,   and in many countries, stock market investors have been rewarded with   such a premium.  ... Historically, bond returns have lagged equity returns by about 5–6   percentage points, annualized—amounting to an enormous return   differential in most circumstances over longer time periods.   Consequently, retirement savers investing only in “safe” assets must   dramatically increase their savings rates to compensate for the lower   expected returns those investments offer. ... The second strategic principle underlying our glidepath   construction—that younger investors are better able to withstand   risk—recognizes that an individual’s total net worth consists of both   their current financial holdings and their future work earnings. For   younger individuals, the majority of their ultimate retirement wealth   is in the form of what they will earn in the future, or their “human   capital.” Therefore, a large commitment to stocks in a younger   person’s portfolio may be appropriate to balance and diversify risk   exposure to work-related earnings (To the question of how the exact allocations were decided:) As part of the process of evaluating and identifying an appropriate   glide path given this theoretical framework, we ran various   financial simulations using the Vanguard Capital Markets Model. We   examined different risk-reward scenarios and the potential   implications of different glide paths and TDF approaches. The PDF is highly readable, I would say, and includes references to quant articles, for those that like that sort of thing.