How is Automation Making Investing Easier?
When I mention ‘automation’ in the investing context, your mind probably jumps to high speed, algorithmic trading. This is where hedge funds and other active traders use bespoke software to read market signals, develop predictions, and execute trades in the blink of an eye. This is all done autonomously, in a closed loop. In effect the trader is a computer.
Sometimes these algorithms are designed to take advantage of trends in pricing, or they spot pricing differentials between similar assets in different markets. This is known as arbitrage and will see the bot purchase the undervalued asset and simultaneously sell the overvalued asset to lock in a risk-free return.
However, in recent years automation has also swept through the world of retail investing. This is a golden age for technology. As full-time workers (and amateur investors), we can reap the benefits of automating our investment strategies and letting computers do the hard work.
I’m not talking about creating our own trading algorithm, but making the most of various automatic features that our bank, stockbroker and investment managers have been introducing into their products recently.
The first thing we can do is automate our savings. We can do this in two ways:
- Setting up a regular fixed transfer from our bank account into an investment account
- Using a savings app to transfer a flexible amount suggested by the app itself.
Regular transfers are sometimes known as ‘standing orders’, and all bank accounts allow this type of automated transfer to be set up. For maximum benefit, set the payment to leave your account the day after you are paid a weekly or monthly wage.
This way, you won’t even notice the cash ever sitting in your bank account, and you’ll therefore be less tempted to spend it.
As the name suggests, fixed transfers are set up at a flat amount each month. This means that you may want to be cautious in how much you decide to transfer. In theory you could setup the transfer for your wage, less any expected spend. However, it’s easy to underestimate the amount we spend on small, difficult-to-remember pieces of expenditure, therefore I recommend leaving at least a 10% buffer between what you think you spend, and how much you factor into the payment amount. This way, even if you spend a little more than expected, you won’t find yourself needing to transfer money back into your bank account to keep it in positive balance.
This is where modern savings apps come in. Several apps exist (I won’t recommend any individual app by name) which link up to your bank account and build up an understanding of your pattern of expenditure. Based on these spending patterns, the app will regularly transfer money between your main bank account and savings account. Simple!
Of course, no forecast will be completely reliable. And the app can only predict transactions which have occurred before, therefore it may not factor in annual costs such as car insurance or taxes.
Automated drip-feed investing
Once the monies are in your online investment platform of choice, you could opt for a ‘regular investment’ plan where you specify in advance how you would like investments to be made on a monthly basis.
The primary advantage of regular investment plans is that the stockbroker will usually offer you dramatically discounted trading fees in return. Whereas buying a stock could cost you £8.99 on some platforms, this may be reduced to £1.50 as part of a regular saving plan. This represents a golden opportunity to top-up existing holdings and also to use any cash leftover from dividend receipts.
The trade-off is that the stockbroker usually processes these orders in a large batch, and therefore it will wait to collect other orders from other gold standard customers before processing. This will lead to a time delay between your deposit and the purchase occurring. However many investors feel this is a very acceptable trade-off.
Finally, retail investment managers and financial advisers find automation helpful in managing the portfolios of clients.
These products are known as ‘robo-advisers’, and refer to a semi-active form of portfolio management.
While the underlying investments might be active or passive investment funds, the portfolio’s asset allocation is dynamic and changes in light of trading conditions, market movements and relative changes in the value of each asset class in your portfolio.
This is still a new development in the industry, and robo-advisers are currently still a niche offering. These products do have the potential to provide a ‘hands off’ investment experience, suited for investors who lack the knowledge or desire to manage their portfolio themselves.
For example, investors do not need to understand how to invest in gold, if their portfolio is automatically managed by a robo adviser who does. An investor could have their money invested in a gold ETF without even knowing how this is practically achieved.
This may encourage more investors to apportion a little part of their portfolio in alternative assets such as land, gold and collectibles.
As this technology costs money to develop, robo-advisers still need to charge fees similar to actively managed ‘funds of funds’ to cover their costs. Replacing a handful of human managers with an expensive software package won’t guarantee a reduction in the overall cost of operating an investment service.
However, over time, as such software systems become more widespread and the size of the funds begin to scale, the annual charges of Robo-advisers may become very competitive with totally passive strategies.