Automated Investing
Automated investing is a technology-driven method of investment management that uses algorithms and mathematical models to make investment decisions. Learn more about it here.
Learn the Basics of Automated Investing
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Automated investing involves using technology, including algorithms, to manage investment portfolios. Robo-advisors are a type of automated investing designed to offer specific investment services, usually to retail investors.
Learn More Robo-Advisor: Advantages and Disadvantages -
Self-directed investing is an investing method where you, the investor, have complete control over what you buy and sell in your portfolio. Automated investing involves allowing computer algorithms to make the buy and sell decisions, taking you out of the process.
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There are several features to keep in mind if you decide you want to invest using algorithmic trading software. But the first decision to make is whether to buy or build your software. Next, make a decision about the kind of market data you require, the connectivity of the program to various markets, and the delay or latency in access to data. These are just a few of the factors you need to decide. Bear in mind that algorithmic trading is a very advanced method of trading at an individual level.
Learn More Pick the Right Algorithmic Trading Software -
Because high-frequency traders often hold large positions for small amounts of time, their activities have been linked to increased market volatility. Market crashes have even been linked to the activity of high-frequency traders. The Flash Crash of May 2010 is a prime example of this type of risk.
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Yes and No. It all depends on the strategy, the effectiveness of the algorithms that underlie the strategy, the portfolio's composition, the market conditions when you invest, and many other factors.
Learn More Do Robo-Advisors Beat the S&P 500?
Key Terms
- Robo-Advisor
Robo-advisors are digital platforms that provide automated, algorithm-driven financial planning services with little to no human supervision.
- Rebalancing
Rebalancing is the process of realigning the weightings of a portfolio of assets. Rebalancing involves periodically buying or selling assets in a portfolio to maintain an original or desired level of asset allocation or risk.
For example, say an original target asset allocation was 50% stocks and 50% bonds. If the stocks performed well during the period, it could have increased the stock weighting of the portfolio to 70%. The investor may then decide to sell some stocks and buy bonds to get the portfolio back to the original target allocation of 50/50. - Asset Allocation
Asset allocation is an investment strategy that aims to balance risk and reward by apportioning a portfolio's assets according to an individual's goals, risk tolerance, and investment horizon. The three main asset classes—equities, fixed-income, and cash and equivalents—have different levels of risk and return, so each will behave differently over time.
- Modern Portfolio Theory (MPT)
The modern portfolio theory (MPT) is a practical method for selecting
investments in order to maximize their overall returns within an acceptable level of risk. - Passive Investing
Passive investing is an investment strategy to maximize returns by minimizing buying and selling. Index investing in one common passive investing strategy whereby investors purchase a representative benchmark, such as the S&P 500 index, and hold it over a long time horizon.
- Active Investing
Active investing refers to an investment strategy that involves ongoing buying and selling activity by the investor. Active investors purchase investments and continuously monitor their activity to exploit profitable conditions.
- Fuzzy Logic
Fuzzy Logic is a non-binary approach to computer logic not based on true or false conclusions. Rather, it is an approach to computing based on a series of variables that attempts to mimic human reasoning and result in a more accurate conclusion.
- Neural Network
A neural network is a series of algorithms that are designed to mimic the way a human brain works. The neural network is able to adapt to changing input and can, therefore, produce useful results without the need for the underlying criteria to be changed as the input changes.
A Deeper Dive into Automatic Investing
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Explore Automated Investing
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