Understanding the features of Robo-Advisers helps you learn how automated decision-makers work. The basic understanding makes it possible to assess whether you might want to employ the services or would prefer to invest without a Robo-Advisor as an investment partner. Robo-Advisors have two primary features that elaborate the blueprints of how the automated advisors work. Robo-Advisors use effective portfolio management and tax-loss harvesting as the basis for productive investment.
A Robo-Advisor analyzes the input data to create a portfolio that optimizes your return. Robo-Advisers effectively utilize Portfolio Management Theory to develop your portfolio. The theory helps in the assessment of your assets and optimal risk that you can handle when investing. The established portfolio maximizes your profits while still ensuring that you take as much as possible. Your optimal risk is determined by the data that you input to the system. Additionally, the theory ensures that all your funds are diversified. You do not invest in a single stock or bond; instead, a Robo-Advisor develops a portfolio that ultimately expands your investments across both risky and non-risky assets. Using your objectives as weights, the Robo-Adviser rebalances the investments to respond to changing economic conditions.
Tax-loss harvesting involves the sale of investment at a loss to defer or minimize the tax paid after a specific financial period. The process consists of the sale of your securities at a lower price than the market price and then buying them at a higher rate after a specific period. The gains collected from other securities are significantly offset after purchasing the assets. Robo- Advisors employ this technique to grow your investments by ensuring that you defer your taxes until after you retire or end up paying lower taxes after a long period. Consequently, you increase the value of your investments without paying taxes for most of your investments by inducing a loss and harvesting it later.
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