Definition Robo Advisors are automated investment platforms that provide portfolio management and financial planning services using algorithms and artificial intelligence, with limited human interaction. The primary function of Robo Advisors is to create and manage diversified investment portfolios based on the investor’s goals, risk tolerance and time horizon.
Components of Robo Advisors Algorithmic Portfolio Management: Robo Advisors employ algorithms to automatically manage, rebalance and optimize investment portfolios based on market conditions.
Definition Dollar Cost Averaging (DCA) is an investment strategy that involves regularly investing a fixed dollar amount into a particular asset or portfolio over a specified period, regardless of the asset’s price. This method reduces the impact of volatility by spreading out the investment over time, which can lower the average cost per share and reduce the risk of making a large investment at an inopportune time.
Importance of Dollar Cost Averaging Risk Mitigation: By investing consistently over time, DCA reduces the risk of making a large purchase when prices are high, thereby minimizing the impact of market volatility.
Definition Growth investing is an investment strategy that focuses on identifying and investing in companies expected to grow at an above-average rate compared to other companies in the market. This approach typically involves targeting stocks of companies that show signs of accelerated growth in earnings, revenue or cash flow, even if their current price-to-earnings (P/E) ratio is high. Growth investors are less concerned with short-term profits and more focused on long-term capital appreciation.
Definition Portfolio rebalancing is the process of realigning the weightings of assets in an investment portfolio to maintain the desired level of risk and return. Over time, as different assets grow at different rates, the original asset allocation can shift, potentially exposing the investor to more risk than intended. Rebalancing involves selling or buying assets to bring the portfolio back to its target allocation, ensuring that the investment strategy remains aligned with the investor’s goals and risk tolerance.
Definition Value investing is an investment strategy that involves picking stocks that appear to be trading for less than their intrinsic or book value. Value investors seek out companies that the market has undervalued, believing that their true worth will eventually be recognized, leading to price appreciation. This strategy is based on the idea that the market overreacts to both good and bad news, causing stock prices to fluctuate more than their underlying fundamentals justify.
Definition Diversification is an investment strategy that involves spreading your investments across various financial instruments, industries and other categories to reduce risk. The principle behind diversification is that a varied portfolio will yield higher returns and lower risks than any individual investment within the portfolio.
Importance of Diversification Diversification is essential as it helps mitigate the risk of loss if one investment or sector underperforms. It also provides the potential for better returns as different sectors and assets perform well under different economic conditions.
Definition ESG stands for Environmental, Social and Governance, three critical factors used to evaluate the sustainability and ethical impact of an investment in a company or business. These criteria help to better determine the future financial performance of companies (return and risk).
Environmental criteria consider how a company performs as a steward of nature.
Social criteria examine how it manages relationships with employees, suppliers, customers and the communities where it operates.
Definition An ETF (Exchange-Traded Fund) is a type of investment fund and marketable security that tracks an index, commodity, bonds or a basket of assets like an index fund. Unlike mutual funds, ETFs trade like a common stock on a stock exchange. ETFs experience price changes throughout the day as they are bought and sold.
Importance of ETFs ETFs are important for providing investors with the flexibility of trading stocks alongside the diversification benefits of mutual funds.
Definition Fixed income refers to a type of investment security that pays investors fixed interest or dividend payments until its maturity date. Upon maturity, investors are repaid the principal amount invested. Fixed income securities are typically used by investors seeking regular income and lower risk compared to stocks. These instruments include government and corporate bonds, treasury bills, municipal bonds and preferred stocks.
Characteristics Capital Preservation: Fixed income investments are often used by conservative investors to protect their capital, as they generally involve lower risk compared to equities.