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How can you optimize robo-advisors for different market conditions?

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Robo-advisors are digital platforms that use algorithms and data to provide automated investment advice and portfolio management. They are popular among investors who want to save time, money, and hassle, while benefiting from the latest technology and market insights. However, robo-advisors are not one-size-fits-all solutions. Depending on your goals, risk tolerance, and preferences, you may need to optimize your robo-advisor for different market conditions. In this article, we will explore some ways to do that.

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1 Choose a robo-advisor that matches your profile

The first step to optimize your robo-advisor is to choose one that matches your profile. Different robo-advisors have different features, fees, strategies, and performance. Some may focus on passive investing, while others may offer active or dynamic asset allocation. Some may cater to specific niches, such as ESG, retirement, or tax optimization. Some may have minimum investment requirements, while others may allow you to start with any amount. You should research and compare different robo-advisors to find one that suits your needs and expectations.

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Tej Vakta

Financial Services Transformation Leader | Driving Sustain-Innovation
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It would be more appropriate to have the title “ Choose a robo-advisor that matches your needs and expectations “ Rather than profile - because an investor may have different needs tied to their short and long-term life goals (like kids college fund Vs vacation home Vs after-retirement-healthcare) and each May require different type of robo-advisor

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2 Adjust your risk level and time horizon

The second step to optimize your robo-advisor is to adjust your risk level and time horizon. Most robo-advisors will ask you to complete a questionnaire to determine your risk profile and investment objectives. Based on that, they will assign you a portfolio that reflects your risk appetite and expected returns. However, you can also tweak your risk level and time horizon manually, depending on the market conditions. For example, if the market is volatile, you may want to lower your risk level and extend your time horizon to reduce the impact of short-term fluctuations. Conversely, if the market is stable, you may want to increase your risk level and shorten your time horizon to capture more opportunities.

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Alak D.

Executive leader Technology & Product Management | Financial Crime Prevention, Regulatory Compliance, Risk Management and Cyber Security Expert
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Interesting topic - reminds of conceptualizing and delivering DRMR (Daily risk management review) solution 10 yrs back for one of the largest private bank in the US (pre robot advisor days) . It’s also a regulatory requirement in HKMA where wealth advisor platform is required to alert with in 24 hrs when risk tolerance level of your portfolio goes higher. To your point Tej, it’s imperative to set investment objective and risk tolerance level while creating and rebalancing portfolio.

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3 Diversify your portfolio across asset classes and regions

The third step to optimize your robo-advisor is to diversify your portfolio across asset classes and regions. Diversification is a key principle of investing that helps you reduce your exposure to specific risks and enhance your returns. Most robo-advisors will automatically diversify your portfolio based on their algorithms and models. However, you can also customize your portfolio to include more or less exposure to certain asset classes or regions, depending on the market conditions. For example, if the market is bullish, you may want to increase your exposure to equities and emerging markets. If the market is bearish, you may want to increase your exposure to bonds and developed markets.

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Tej Vakta

Financial Services Transformation Leader | Driving Sustain-Innovation
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This may also include different types of robo-advisors with specialized assets (some with focus on arts & collectibles Vs some on real-estate-crowdfunding Vs Crypto)

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George B.

What If the USA Stock Market Timing Worked?
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Customizing a portfolio should include a contrarian strategy, which opposes the trend-following approach. It's based on the idea that asset class performance fluctuates around historical averages. After underperformance, there's a higher chance of future outperformance. This strategy capitalizes on market overreactions to recent trends, offering a counterbalance to conventional strategies.

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4 Rebalance your portfolio periodically or automatically

The fourth step to optimize your robo-advisor is to rebalance your portfolio periodically or automatically. Rebalancing is the process of adjusting your portfolio to maintain your target asset allocation and risk level. As the market changes, your portfolio may drift away from your original plan, resulting in overexposure or underexposure to certain assets or regions. Rebalancing helps you restore your portfolio to its optimal state and avoid deviation from your strategy. Most robo-advisors will rebalance your portfolio periodically or automatically, based on their rules and thresholds. However, you can also choose to rebalance your portfolio manually, depending on the market conditions. For example, if the market is trending, you may want to rebalance less frequently to ride the momentum. If the market is choppy, you may want to rebalance more frequently to avoid losses.

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5 Monitor your portfolio performance and fees

The fifth step to optimize your robo-advisor is to monitor your portfolio performance and fees. Monitoring your portfolio performance helps you track your progress and evaluate your results. You should review your portfolio performance regularly and compare it with your benchmarks and goals. You should also check your portfolio fees and expenses, such as management fees, trading fees, and fund fees. You should ensure that your fees are reasonable and competitive, and that they do not erode your returns. Most robo-advisors will provide you with online tools and reports to monitor your portfolio performance and fees. However, you can also use external tools and sources to verify and analyze your portfolio data.

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6 Review your robo-advisor periodically and switch if needed

The sixth step to optimize your robo-advisor is to review your robo-advisor periodically and switch if needed. Reviewing your robo-advisor periodically helps you assess your satisfaction and alignment with your robo-advisor. You should consider factors such as performance, fees, features, customer service, and reputation. You should also update your robo-advisor with any changes in your personal or financial situation, such as income, expenses, goals, or risk tolerance. If you are unhappy or dissatisfied with your robo-advisor, you should not hesitate to switch to another one that meets your needs and expectations. You should also be aware of the potential costs and implications of switching, such as taxes, penalties, or delays.

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7 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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George B.

What If the USA Stock Market Timing Worked?
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Recognizing that contrarian dynamic asset allocation provides an opportunity for long-term outperformance, I would seek a Robo-Advisor that not only recommends reputable/cheap index funds and basic allocation strategies but also provides contrarian signals when a class is either outperforming or underperforming relative to its historical average and indicates potential directional changes. Additionally, it should offer the ability to leverage when the market is historically low following a crash. Yes, I am referring to market timing because it, at the very least, offers a chance for outperformance. Relying solely on stock picking is too limited, given the evidence that the majority of outperformance results from asset allocation

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How can you optimize robo-advisors for different market conditions?

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3

4

5

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1 Choose a robo-advisor that matches your profile

2 Adjust your risk level and time horizon

3 Diversify your portfolio across asset classes and regions

4 Rebalance your portfolio periodically or automatically

5 Monitor your portfolio performance and fees

6 Review your robo-advisor periodically and switch if needed

7 Here’s what else to consider

Financial Technology

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How can you optimize robo-advisors for different market conditions?

1

2

3

4

5

6

7

1 Choose a robo-advisor that matches your profile

2 Adjust your risk level and time horizon

3 Diversify your portfolio across asset classes and regions

4 Rebalance your portfolio periodically or automatically

5 Monitor your portfolio performance and fees

6 Review your robo-advisor periodically and switch if needed

7 Here’s what else to consider

Financial Technology

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