How Robo-Advisors Can Help You Align Your Investment Goals With Your Risk Profile

In recent years, robo-advisors - or automated investing - have rapidly risen in popularity, radically shifting how individuals approach investing. 

Automated platforms such as Betterment, Wealthfront, SoFi, and others offer accessible and affordable investment solutions, many with no minimum account balance requirements. Their digital convenience has made them particularly appealing to younger generations.

In this article, I will cover some fundamentals that will help you capitalize on the benefits of robo-advisors.

Read: What is a Robo Advisor?

How robo-advisors work

During the onboarding process, you will need to fill out a comprehensive questionnaire. This will help ensure that your smart money manager has sufficient information about you to recommend an optimal asset allocation and strategy based on your income, expenses, risk tolerance, and preferences.

Hence, it helps to have a thorough understanding of your financial goals and needs. This is why many investors seek individual consultations with a wealth manager. If you have a substantial amount to invest, I recommend that you do this.  

Be clear on your financial goals, and their timeline

To align your financial decisions with your goals, first, get clear on the timeline. 

Typical investment goals can be short-term (1 year), medium-term (3 to 10 years), and long-term (retirement) horizons. As a general principle, the longer your investment horizon, the more risks you can afford to take.

Short-term goals, such as saving for a vacation, favor more conservative instruments like money market funds or low-risk bonds. Medium-term objectives, like setting aside money for your children’s education, allow for diversification towards stocks and commodities. 

Finally, long-term strategies often adopt a more aggressive plan, considering global portfolios and alternative investments, though they often have lower liquidity levels.

Read: Why Use a Robo Advisor?

Understanding your risk profile

Almost every investor would nod at the promise of high returns, however, not many are willing to take the risks these entail. Understanding your risk profile is key. 

Your risk profile consists of two factors: your ability to take risks and your willingness to do so. While you might feel inclined to put all your money in highly volatile cryptocurrencies, it is not a good choice if that compromises your ability to put food on the table. 

A person’s ability and willingness to take risks can vary widely. For instance, a successful young professional with a long-term investment horizon might panic every time their account is in the red. Even though their finances are not affected by a loss, emotionally, they struggle. 

Based on this, I strongly recommend you align your risk willingness and ability before using a robo-advisor, and that you review this periodically.

Choosing the right robo-advisor

There are myriad robo-advisors out there. My suggestion would be, before anything, to consider the robo-advisor’s reputation and legal status, and whether they are registered with their country’s financial authority (like the SEC). 

Then, make a decision based on your needs. If you are looking for a simple platform with a low investment threshold, your choice will be different than if you are a sophisticated investor who needs a variety of strategies and target investment markets. The most advanced platforms will have a broad offering of strategies for different types of investors, which sometimes can be customized. Consider other factors like fees and liquidity.  

Read: What is a Robo Advisor?

The bottom line

Robo-advisors offer many advantages. Not only are they generally more affordable than any other investment management service, but, being fully automated, they are also more convenient. 

However, to make the most out of investing through a robo-advisor, you need to know yourself well. This means understanding your financial goals and needs. Being clear on this will help you choose the best strategy and harness the power of automated investing in your favor

.Read: What is a Robo Advisor?

This article is from an unpaid external contributor. It does not represent Benzinga's reporting and has not been edited for content or accuracy.