Working Definition

Let’s begin with a good clear definition of what we are talking about here so that everyone is on the same page. For the purposes of this article, we will define an online investment service as any sort of investment service where you don’t have the dedicated attention of a specific financial adviser. In most cases, this is done as a sort of lowering the bar if you will so that those with fewer dollars to invest can still benefit from professional advice.

Robo-Advisers?

Although you may have encountered the term robo-advisers in and around your Google Searches for investment advice, this phrase is something of a disservice to the industry.

Uh, hmm; not so much. Actually this is considered to be somewhat of a derogatory term by those in the business. Although you may have encountered the term robo-advisers in and around your Google Searches for investment advice, this phrase is something of a disservice to the industry. For example, the term “robo” implies more of a commoditized, mass produced product. Yet as you already know, each financial situation is unique. Consequently it would not make sense to try and use one size fits all approach to your personal finances.

What’s Available?

It turns out that there is a wide range of online investment services out there. Depending on which firm you are looking at, you can receive access to services such portfolio management, asset management, investment advising, financial planning, portfolio analysis, online brokerage services, asset allocation advice and more. The point is that depending on your own personal financial situation, chances are you can locate an online investment advisory service that fits your needs.

How Do They Do It?

Understand that even the best online investment service can only work with what you give them. Most of these firms start the process with an online questionnaire for you to fill out. For example, should you happen to interested in how best to allocate your assets among the various investment choices available to you, the online questionnaire will have specific questions about your time horizon. Using this information, the adviser will then suggest a model portfolio for you to model based on that timeline.

Using an online investment adviser means you have to take the time out to carefully think through the initial part of the setup.

At the same time, there are some online investment advisory services that offer to select which portfolios that best fit your time horizon, your risk tolerance, that sort of thing. The point to get here is that using an online investment adviser means you have to take the time out to carefully think through the initial part of the setup. Otherwise, the advice you receive, the portfolio models and such will have little to no real meaning.

Real World Examples

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Here is what this looks like in the real world. Take a look at how it works at the online investment company named Betterment. Betterment begins their process with an online interview process that is specifically focused on your time horizon for specific goals. During this process, you have a wide range of different investment goals to choose from such as wealth building, retirement savings amount, retirement income targets, safety net funding amounts, IRA and more.

Going a step further is another online investment adviser firm named Hedgeable. Hedgeable takes this process one step further. Instead of merely offering you up model portfolios and the like, Hedgeable will actually manage your money for you to meet the goals you have identified. This means Hedgeable will buy and sell securities for you account.

One more step up the online investment service can be found at Personal Capital. Like Hedgeable, Personal Capital will also manage your money for you. Yet Personal Capital takes it one step furhter. Personal Capital provides wealth management services.

Now What?

The above list is but a small sampling of what is available out there in terms of online investment services. Bottom line is this: if you are the type who doesn’t mind taking care of your personal finances online, then online investment advisers are the next logical step for you. On the other hand, should you be more comfortable dealing with your financial adviser face to face, well that option is still available also.

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Yeah, it may look like a bit of work. It may even not look so appealing with all of those pundits on TV jumping up and down and screaming at the market gyrations. Yet the fact remains that taking care of your personal financial future is your responsibility and yours alone. Unless and until you happen to hit the Big One with the Powerball lottery or some sort of odd windfall, the reality is you need to start putting money away, like right now.

Not under your mattress

The only sure thing you can count on is our friends at the Internal Revenue Service (IRS) doing what they do to make sure you pay your fair share.

Now it goes without saying but better we just go ahead and say it anyway; putting money away does not mean stuffing it under your mattress or throwing your hard earned money at a company stock your pal insists is a “sure thing”. Nope, not so much. The only sure thing you can count on is our friends at the Internal Revenue Service (IRS) doing what they do to make sure you pay your fair share. The point of all this: strategically putting your money into the market is a recognized way to help fund your retirement.

Fund the 401(k) first

Now that being said, for the purposes of this article this investing stuff is going to only ever be done after you have maximized your 401(k) plan options at work and after you have also set up your very own Individual Retirement Account. In other words, maximize the retirement plans and options you already have first and foremost. Then, its time to dip your toe into what the pro’s refer to as the equities market.

Reality of investment returns

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And lest you should be thinking that there are better options out there, well to be blunt, you would be wrong. You see, the truth of the matter is that any investment can show off and have a stellar performance for a short period of time. The bigger and better question is what is the long term return of the investment option you happen to be looking at?

With just a little bit of homework, okay not even that much, you can easily check this out for yourself with a quick Google search.

What you will find is that over the long term, equity investments (think stocks) consistently return an average of 7%. Yes, that includes good years and not so good years. The point is that 7% number is actually pretty high compared to other “so-called” investments such as real estate, gold, or even collector coins.

Ease In Plan

Which brings us to the focus of today’s article: how can you ease your way into the market without taking a beating. Taking a beating would mean something like handing over $2,500 to your online broker only to discover that the value of your portfolio (the stocks you bought) has suddenly and without warning plummeted to like $1,374.00. Ouch! No wonder so many would be investors shy away from the market.

Yet, do not lose sight of that 7% long term return number discussed above. So let’s see where we are. You understand the need to get into the market. Yet at the same time you are leery of investing your hard earned money and risk losing some or all of your cash. Is there a way out of this quandary? Thankfully there is.

The Answer

The solution is to use a strategy referred to as Dollar Cost Averaging (DCA). Although the term itself may sound esoteric, the strategy is ridiculously easy to understand and put into practice. Essentially dollar cost averaging works by you only ever investing a certain fixed amount on a regular schedule. For example, suppose at the end of every three months, you put $325.00 into the market.

In other words, you are funneling $325.00 per quarter into your investments. But, that is NOT the same as putting in a lump sum at the end of the year. The point is to put in the same amount at a regular interval.

What happens is that when the market prices are high, you end up with fewer shares. That’s okay though because the same thing works in reverse. When the market is low, that same amount of money invested will get you more shares. Do you see how easy this is?

A side benefit of dollar cost averaging that could end up saving you from making a catastrophic decision is your investments are on cruise control. That is, Dollar Cost Averaging takes the emotional highs and lows out of the investing thing. Sadly most investors who aren’t up with DCA do the exact opposite of what successful investors do. That is, they buy high (when the market rises) and sell low (usually in a panic when the market drops).

Conclusion

You owe it to your future personal financial situation to get into the market like right now. Knowing and understanding the strategy of Dollar Cost Averaging is an easy way to get started and to keep it going.

Now it’s on you. Have you considered something like dollar cost averaging as a way to ease into the market?

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