Reduce Emotional Trading with Robo-Advisors

June 14, 2024 Beginner
Trading with your emotions during times of market volatility? Explore whether a robo-advisor may be able to help.

Investors react to volatile markets in a variety of ways. Some choose more cautious investment strategies, invest in perceived "safe haven" assets, such as gold and silver, or exit the markets completely. Others become more aggressive. Some consult a financial advisor, while others take no action.

Trading technology has given rise to another way to attempt to mitigate risks from market volatility:"robo-advisors." Robo-advisors automate trades and potentially help investors minimize emotional impulses.

How a robo-advisor can potentially help investors

Investing technology continues to improve and investors now have more choices for combating market volatility. Digital investment services such as robo-advisors were in the early development stages less than 15 years ago, but they are quickly becoming more popular and advanced in their offerings.

Robo-advisors allow investors to select investment portfolios that are recommended based on their financial goals, risk tolerance, and timeline. When it comes time to rebalance the portfolio, the changes to asset allocation are based on an algorithm and target allocation instead of the individual investor, which can help eliminate the influence of emotional investment decisions. Various portfolio choices, asset allocation models, and even some aspects of the algorithm are usually designed by a team of investment professionals. 

Robo-advisors can assist investors in navigating market volatility more confidently because the investment decisions made by robo-advisors are more disciplined and not based as heavily on human emotion. Investors who use robo-advisors can potentially benefit from the convenience of using a formula based on the theories and practice of investment professionals and academics, potentially reducing the amount of time an investor spends on research and portfolio management. And depending on the offering, many robo-advisors carry low fees and low investment minimums.

Robo-advisors can provide tailored portfolios based on your goals and timeline. Schwab offers two different choices:

  • Schwab Intelligent Portfolios®: The robo-advisor builds, monitors and rebalances your portfolio, and you can get 24/7 live support from U.S.-based service professionals.
  • Schwab Intelligent Portfolios Premium®: In addition to offering robo-advisor insight, it's possible to get human guidance as well, with access to unlimited 1:1 guidance from a CERTIFIED FINANCIAL PLANNER , interactive planning tools, and a personalized roadmap for reaching your goals.

The bottom line

If market volatility is among your top investment concerns, a robo-advisor may be worth considering for automated trading decisions. Robo-advisors leverage the experience of professional portfolio managers and computer algorithms to help you avoid some of the emotional pitfalls that can arise in turbulent trading times.

Consider both the pros and cons of robo-advising as you determine the appropriate strategy to pursue your financial goals.

We encourage you to read the Schwab Intelligent Portfolios Solutions disclosure brochures for important information, pricing, and disclosures. Before you enroll, it's important you understand any and all costs, including the role of cash and the way Schwab earns income from the cash allocation in your portfolio, which will affect performance, and how Schwab and its affiliates work together.

Schwab Intelligent Portfolios® and Schwab Intelligent Portfolios Premium® are made available through Charles Schwab & Co., Inc. ('Schwab'), a dually registered investment adviser and broker-dealer. Portfolio management services are provided by Charles Schwab Investment Management, Inc. ("CSIM"). Schwab and CSIM are subsidiaries of The Charles Schwab Corporation.

There is no advisory fee or commissions charged for Schwab Intelligent Portfolios. For Schwab Intelligent Portfolios Premium, there is an initial planning fee of $300 upon enrollment and a $30-per-month advisory fee charged on a quarterly basis as detailed in the Schwab Intelligent Portfolios Solutions disclosure brochures. Investors in Schwab Intelligent Portfolios and Schwab Intelligent Portfolios Premium (collectively, "Schwab Intelligent Portfolios Solutions") do pay direct and indirect costs. These include ETF operating expenses which are the management and other fees the underlying ETFs charge all shareholders. Schwab does not charge an advisory fee for the SIP Program in part because of the revenue Schwab Bank generates from the cash allocation (an indirect cost of the Program). The portfolios include a cash allocation to FDIC‐insured Deposit Accounts at Charles Schwab Bank, SSB ("Schwab Bank"). Schwab Bank earns income on the deposits, and earns more the larger the cash allocation. The lower the interest rate Schwab Bank pays on the cash, the lower the yield. Some cash alternatives outside of Schwab Intelligent Portfolios Solutions pay a higher yield. Schwab Intelligent Portfolios Solutions invests in Schwab ETFs. A Schwab affiliate, Charles Schwab Investment Management Inc., receives management fees on those ETFs. Schwab Intelligent Portfolios Solutions also invests in third-party ETFs. Schwab receives compensation from some of those ETFs for providing shareholder services, and also from market centers where ETF trade orders are routed for execution. Fees and expenses will lower performance, and investors should consider all program requirements and costs before investing. Expenses and their impact on performance, conflicts of interest, and compensation that Schwab and its affiliates receive are detailed in the Schwab Intelligent Portfolios Solutions disclosure brochures.

The cash allocation in Institutional Intelligent Portfolios will be accomplished through enrollment in the Schwab Intelligent Portfolios(R) Sweep Program (Sweep Program), a program sponsored by Charles Schwab & Co., Inc. By enrolling in Institutional Intelligent Portfolios, clients consent to having the free credit balances in their Institutional Intelligent Portfolios brokerage accounts swept to deposit accounts at Charles Schwab Bank through the Sweep Program. Charles Schwab Bank is an FDIC-insured depository institution affiliated with Schwab. Funds deposited at Charles Schwab Bank are insured, in aggregate, up to $250,000 per depositor, for each account ownership category, by the Federal Deposit Insurance Corporation (FDIC). For more information consult the Schwab Intelligent Portfolios Sweep Program Disclosure Statement. Charles Schwab & Co., Inc. and Charles Schwab Bank are separate but affiliated companies and subsidiaries of The Charles Schwab Corporation. Brokerage products, including the Schwab One brokerage account, are offered by Charles Schwab & Co., Inc., Member SIPC. Deposit and lending products are offered by Charles Schwab Bank, Member FDIC and an Equal Housing Lender.

Diversification, asset allocation, automatic investing and rebalancing strategies do not ensure a profit and do not protect against losses in declining markets.

The information here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The type of securities and investment strategies mentioned may not be suitable for everyone. Each investor needs to review a security transaction for his or her own particular situation. Data here is obtained from what are considered reliable sources; however, its accuracy, completeness or reliability cannot be guaranteed.

Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.