Investing can feel extremely overwhelming. In addition, the schedules of training doctors often prevent them from doing the research they believe is necessary to start investing. This can lead to delay of investing or foregoing investing all together. I’d like to share 2 ways to start investing with little to no knowledge.
Roboadvising is a financial product that was introduced to provide passive investing for people who don’t have any interest in learning the ins and outs of investing. There are several companies that offer this service. Among these providers, Betterment and Wealthfront have led the forefront.
Roboadvisors differ from other financial products in that there is no physical person managing the portfolio. These portfolios usually consist of many different low-cost index funds that follow the general trend of the market. The lack of a human portfolio manager can benefit its investor by keeping fees low and removing human emotion from the act of investing.
It should be noted that these roboadvisor services do not come fee-free. These service often charge a fee of 0.25% of your total portfolio. As you can imagine, these fees can add up and cut into your profit margins. These fees can be waived by taking advantage of their referral programs, but if you don’t want to be the friend hounding everyone to join, I would prepare yourself to pay some fees eventually.
Examples of RoboAdvisors
Betterment’s investment philosophy has focused on the clients goals. Upon providing them with you investment goals, they will formulate a portfolio best suited for you. Their portfolio formulation relies on finding an asset allocation and appropriate choice of funds. Their fees range from 0.25% – 0.40%.
Betterment is relatively transparent with their asset allocation which is great for investors that want to know where their money is sitting. A large downside to Betterment is the lack of waiving of the management fees. If avoiding fees is something you are interested in, Wealthfront may be a better choice.
Wealthfront is another roboadvising option for investors. Wealthfront was a saving grace for me during medical school. Wealthfront put a stop to my foolish day trading activities, and provided me with consistent returns for the duration of my time in school.
Like Betterment, Wealthfront tends to be goal oriented in their investment philosophy. A downside of Wealthfront is that they are typically less transparent on the details of your investment portfolio. That said, a huge advantage that Wealthfront hold is the ability for the client to waive their 0.25% management fee. Using Wealthfronts referral program, clients are able to add another $5,000 of fee-free management to their portfolio.
Low Cost Index Fund Investing
The second and my preferred option of mindless investing is utilizing low cost index funds. Index funds are a financial product offered by a multitude of banks. These are the same products that roboadvisors purchase on your behalf.
Index funds such as VTSAX from vanguard or SWTSX from Schwab follow a market index. This index can range from the S&P 500 to the Dow Jones. Historically, long term investing into the overall market has been more beneficial than trying beat the market by stock picking. By investing into a low-cost index fund on a monthly basis you can ensure your participation in a market that historically has done very well in the long run.
Index funds have been a staple in my portfolio. Another aspect that makes index funds so advantageous is the lack of fund manager fees. You can bypass the 0.25% fee paid to a roboadvisor by doing it yourself. Sure, you have to figure out your asset allocation on your own as well as rebalance your portfolio once a year. Though, I can assure you that once it is set, investing in an index fund is almost as mindless as investing with a roboadvisor.
Where To Invest In Index Funds
Index funds can be purchased from many different brokerages. Schwab has always been one of my favorites due to its low minimum investment. Schwab index funds can be purchased for as little as $1.00!
Vanguard has long been the favorite of many index fund investors. You can find VTSAX on many investors portfolios. There is a $3,000 minimum investment on many of their index funds. If this is out of your budget, buying the ETF equivalent can be a great alternative.
Take Away Points
- Using roboadvisors and index funds can be a great way to invest without thinking very much
- Keep in mind that roboadvisors may charge fees anywhere between 0.25% – 0.40% for using their services
- Roboadvisors will take care of asset allocation for you
- Index funds are a great way to lower fees paid to a portfolio manager
- Index fund will require that you set your asset allocation as well as rebalance your portfolio on a regular basis