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Do you want a low-maintenance investment strategy that you can set and forget? Are you aiming for the best return you can get for the amount of risk you’re comfortable with? If you’re saving for a long-term goal—like retirement or college—having a clear, reliable plan helps ensure the money will be there when you need it.
Robo-advisors are online platforms that manage your investments automatically. They use algorithms and basic portfolio principles to create a mix of assets based on your goals, risk tolerance, and timeline. Some offer extra services like access to human advisors or more customization. Fees vary widely, from no management fee at all up to around 0.70% of assets each year.
Target-date funds are mutual funds built for retirement. Each fund is labeled with a year—your expected retirement or withdrawal year—and the fund gradually shifts its mix of stocks and bonds to become more conservative as that date approaches. They simplify retirement investing by offering one portfolio that adjusts over time.
Which is better depends on your needs. Robo-advisors give more personalization and flexibility, while target-date funds are a simple, hands-off choice for retirement accounts. You can also use both: for example, keep a target-date fund in your 401(k) and use a robo-advisor for other goals like a down payment or general investing.
Index funds are mutual funds or ETFs that track a market index, such as the S&P 500. Many robo-advisors build portfolios from index funds covering U.S. and international stocks and bonds. Choosing between buying index funds yourself or using a robo-advisor often comes down to whether you want a professionally balanced portfolio and how much you’ll pay in fees. Low-cost or no-fee robo-advisors can make the trade-off easier.
Robo-advisor returns generally reflect the returns of the underlying index funds in the same proportions as your allocation. For example, if 20% of your portfolio is in an international stock index fund, roughly 20% of your portfolio’s return will come from that market segment. Robo-advisors typically don’t beat the market; they match market returns for the chosen allocation, minus any advisory fees.
Different robo-advisors can lead the performance charts at different times because returns depend on which market segments are doing well and how each robo-advisor allocates assets. Whatever option you choose, weigh the pros and cons against your financial situation and comfort with investing, and review your strategy regularly to make sure it still fits your goals.
