A hard-working 19-year-old woman has $10,000 from summer and part-time jobs to invest. Her mother wants to know where the money should go – a robo-adviser, index funds or other options?
"She could be a good example of a young investor who could get on the right path early on," the mother writes. I couldn't agree more. If this investment goes well, it sets this 19-year-old up for a lifetime of success as a saver and investor.
A key consideration in making a choice of investment is timeframe. Unless the money won't be needed for at least five to 10 years, it's too risky to invest in the stock market. Losing money in stocks would be a harsh lesson for a young adult just starting out as investor. The longer the timeframe, the better the chances of good results from stocks.
In this case, the 19-year-old's cost of post-secondary education are covered. So let's figure on least five years and probably more before the money is needed. That means there's opportunity to have some exposure to the stock and bond markets rather than leave the money safe in a high rate savings account.
I vote for a robo-adviser as a way for this young woman to get into investing, rather than using individual mutual funds, exchange-traded funds or stocks. A robo-adviser will build a portfolio of ETFs designed for her needs at a low cost. Just as importantly, the robo-adviser will maintain the portfolio over time by rebalancing the mix of stocks and bonds back to the optimum mix for this individual's needs. If she loses track of her investments for a couple of years while studying in college or university, the robo-adviser will have her back. . If this young woman had more money to add to her account, all she has to do is send it to the robo-adviser to invest for her.
Robo-advisers do a very good job overall of providing transparency, which is great for young people just starting out as investors. They can easily see how much they're paying fees and how their portfolio is performing. It's more likely someone will stick with an investing approach if they feel that they are well informed about the experience and treated with respect.
There are cheaper alternatives to robos, and perhaps there are ways to make bigger returns. Where robos beat the competition is in positioning people for investing success through low fees, sensible portfolio building and reliable portfolio maintenance over the years. If the $10,000 is to be invested, robos are a great option.