When it comes to investing, most people want to generate the highest possible ROI. However, not everyone has the time and skill to conduct immense research to find the best investment options. Because of this, people often turn to mutual funds or to robo advisors to invest their money for them. However, deciding which to use: mutual funds vs. robo advisors, can be tricky.
A mutual fund is a pool of funds which are gathered from many different investors. Mutual funds are typically handled by money managers, who make the decisions about which assets will be purchased. A robo advisor is a software program that picks investment options based on pre-set algorithms.
So, mutual funds are generally run by humans, and robo advisors are run by software programs. Both of these investing options can be very beneficial for generating returns. However, the question is whether or not one option is significantly better than the other.
Pros and Cons of Mutual Funds
The benefits of mutual funds are that they are tried and true, and have a longer history of good performance. Robo advisors are still relatively new, and so there is not a long history that can be examined to evaluate performance, like with mutual funds. The fact that mutual funds are managed by people who are usually experienced and who possess a high level of financial intelligence is also very beneficial. Further, with mutual funds, you can select a sector-specific fund, or choose your fund based on other factors.
But, despite the benefits and exciting aspects of mutual funds, they come at a cost. The average mutual fund can take 1-3 percent, which can add up if you are investing in a long-term fund. There can also be a number of other costs. These costs can be significantly higher than those associated with robo advisors, which is why many people are starting to now look to robo advisors. Mutual funds can also be subject to the emotional reactions of their managers. Emotional reactions can be dangerous in the world of finance.
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Pros and Cons of Robo Advisors
Perhaps the greatest pro of robo advisors is that they are much cheaper than mutual funds. In fact, many robo advisors only cost about .25 percent. If you are investing large amount of money, then this can translate to thousands of dollars saved every single year in fees. Robo advisors are also not subject to the emotional reactions of human beings, because there is no human being making daily decisions about the investments. All decisions are made based on algorithms and mathematical formulas. This can be very beneficial in some circumstances. Further, robo advisors are high-tech, which can make them very appealing to tech-savvy millennials who are looking to get into investing at low costs.
Although robo advisors are very useful, they also have some significant cons. As mentioned above, one con is that they do not have decades’ worth of performance history to evaluate since they are so new. Also, robo advisors are not run by financial planners or money managers with years of experience and high levels of expertise. They are typically run by algorithms. This can be viewed as a disadvantage. Especially considering the fact that if something goes wrong, you cannot speak to the robo advisor and get advice. With a mutual fund, there is often someone who can be spoken with for counselling, if something goes majorly wrong.
So, which is best?
It is difficult to say that one investment vehicle is better in every single situation. The truth is that the different options are better for different people. For example, people who simply want to find an investment strategy with very low fees may be better off with robo advisors. However, people who want to make sure that their money is being managed by someone with decades’ worth of experience and a positive track record may be better off with mutual funds.
Ultimately, it all comes down to what you are looking for. However, both of these options can be very successful. They can also can both be much better than trying to invest the money yourself if you are not experienced and do not really know what you are doing. So, when it comes to mutual funds vs. robo advisors, your individual situation and investing goals will have a lot to do with which is the better option.