Welcome to automated investing, where software can help build and manage your investments in a well diversified and rebalanced portfolio that can exceed market returns.
Wait, software can do that? It sure can. Robo-advising provides digital financial advice based on mathematical rules and algorithms that aren’t subject to the human emotions that drive many of our financial decisions, even when we know it shouldn’t. The premise of the robo-advisor is to provide a risk-oriented investment strategy to a wide group of people that can bring greater returns at more affordable rates than most humans. In fact, academic research has proven for decades that over 90% of wealth advisors can’t outperform the market over a 5 year period. Ask yourself - do you have one of the wealth advisors in the top 10% of returns?
Modern Portfolio Theory
Modern Portfolio Theory (MPT) is the foundation that all robo-advisor platforms are built on. Modern portfolio theory, or mean-variance analysis, is a mathematical framework for assembling a portfolio of assets such that the expected return is maximized for a given level of risk. It was developed by economist Harry Markowitz in the 1950s and his theories surround the importance of portfolios, risk, diversification, and the connections between different kinds of securities. In particular, MPT advocates diversification of securities and asset classes. Simply put - the importance oof not putting all your eggs in one basket.
What does all that mean? It means it’s less about what stocks you pick and more about the diversification of assets in your portfolio that can greatly reduce unsystematic risk.
Robo-advising also leverages passive investing which incorporates MPT by choosing index funds that are low cost and well-diversified. Passive investing is a buy-and-hold portfolio strategy for longer-term investment horizons, with minimal active trading in the market. Index investing like Infinite Giving uses is perhaps the most common form of passive investing because it is cheaper, less complex, and often produces superior after-tax results over medium to long time horizons than actively managed portfolios. Pretty perfect for nonprofits, right?
Robo-advisors change the narrative.
Introduced a decade ago, robo-advisors are becoming mainstream with 100s now available. These digital platforms provide automated, algorithm-driven financial planning services with little to no human supervision and are much more adept at reading data, recognizing trends, and forecasting than any human could ever be. They make decisions not based on emotion or gut feeling but pure, analytical data processing.
The advent of modern robo-advisors has completely changed that narrative by delivering the service straight to consumers. After more than a decade of development, the industry has experienced explosive growth with client assets managed by robo-advisors hitting $987 billion in 2020, with the expectation of reaching $2.9 trillion worldwide by 2025.
The consumer shift towards using fintech (financial technology) applications for investment management is disrupting a traditional industry, and Infinite Giving is democratizing nonprofit investments to help them grow their giving, infinitely.