Algorithmic Trading vs Robo Advisors – What is the Difference?
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The world of investing for common folks like you and I has certainly come a long way since the days of actively and manually investing your own money. This is perhaps still the general impression people get when you tell them that you are investing your money, but the truth is thanks to the help of technology, the amount of time and effort you need to put into investing has been reduced significantly.
Technology can help you to manage perceived risk of putting your money into something you might not necessarily know a lot about. It can also mitigate concerns regarding uncertain assets such as cryptocurrencies.
Enter robo-advisors and algorithmic trading. Both relatively automated forms of investing, they encompass various technologies respectively to enable the average retail investor to adjust their investments according to their goals and risk profile without the need for an actual human advisor. But there are some nuances between the two that you should know about. We have broken down some of the pros and cons below.
What is a Robo Advisor?
Simply put, a robo-advisor is a platform that helps you invest your money automatically based on factors such as risk tolerance, time horizon, etc, that are set by you. The platform’s algorithm will then manage and invest your portfolio based on these factors to achieve your investment goals, executed by a software.
- Reduced cost – Compared to traditional management of funds, one of the core principles of robo-advisors is to cut the middleman (the financial advisor) out of the process, thus reducing cost like advisory fees for investors
- Peace of mind – Most robo-advisors tend to invest in a variety of overseas Exchange Traded Funds (ETFs). The diversification in portfolio allows you greater peace of mind.
- Low starting capital – Because you are not investing into the full actual underlying assets. robo-advisory platforms allow you to own parts of the assets.
- Lack of flexibility – the counter argument to having a purely automated system is of course the fact that you can’t make any decisions and alter the investments held in the portfolio.
- Currency charges – what people may not realise is that because a lot of the ETFs are US-based ETFs, you will incur both conversion fees as well as be subject to the spread on conversion rates as well
- Recurring fees – as opposed to trading on your own, robo-advisors charge recurring fees, which are over and above the usual management fees for ETFs, so this is something you need to factor into your cost of investing
What is Algorithmic Trading?
Algorithmic trading is arguably the older brother (or distant cousin, whichever you prefer) to robo-advisors. Also an automated form of investing, and used rather widely in the trading industry, it allows the user to specify certain trading strategies and then executes trades based on that strategy.
- More options on what to invest in – Algo trading allows the user to set a strategy and invest in various types of asset classes, making it more flexible as compared to robo-advisors
- Backtesting – probably the core important feature of algorithmic trading, this allows users to test a strategy against historical market performance to validate a strategy. This is great for beginners because they don’t have to come up with something on their own, and can essentially use what has worked before.
- Constant refinement – after a period of time, you might want to review the performance of your strategy and optimise your trading decisions. This is also part of the flexibility that algo trading allows for.
- More time consuming than robo-advisors – this is really a relative comparison because as it is, algorithmic trading already removes a lot of the time required from traditional investing. However, you will still need to put some time into setting this up at the start.
- Stop-loss triggers – when a stop is activated, your loss will be realised. This is a good way to mitigate risk, but as we wrote previously, not all stops are made equal, so it’s important to be aware of that too.
What platforms can you do algorithmic trading on?
The industry standard at the moment for algorithmic trading is a platform called Meta Trader 4 (MT4). Companies such as IG use MT4 as it is armed with features that allow retail investors to set custom alerts and indicators, and even execute trades. You also get access to expert opinions to help you shape your strategy.
For beginners who want to get their hands dirty but don’t necessarily want to put their money in yet, you can open a demo account and start practicing first without putting your money at risk.
You can easily find out more about opening an MT4 account here, or even access IG’s repository of educational information on trading before you begin. If you need more guidance, you can also consider signing up for the algorithmic trading seminar coming up on 19 March. All you need to do is sign up for the free IG demo account and you can easily register for the seminar once you have done that.
If you are someone who is looking to grow your money in 2019 but doesn’t want to spend a huge amount of time like an active trader does gathering information, algorithmic trading could be a fantastic way to start.
What are your thoughts on automated investing? Do you think it is better than traditional investing? Share your thoughts with us here!
The information in this article is meant for informational purposes only and should not be relied upon as financial advice. Users may wish to approach a financial advisor before relying on any advice provided by the website to make any decision to buy, sell or hold any investment product.