3 Tips For Investing Online

The growing number of online investing tools, and the proliferation of so-called robo advisors that allow investors to get entire asset allocation plans done with the click of a mouse, are all great technological advancements, but they require a certain level of caution from investors.

The Securities and Exchange Commission recently offered some suggestions of things to look out for—or to avoid completely—before investing money online.

“While automated investment tools may offer clear benefits—including low cost, ease of use, and broad access—it is important to understand their risks and limitations before using them,” the SEC said in an investor alert. “Investors should be wary of tools that promise better portfolio performance.”

Understand Terms & Conditions, Especially Fees

As an investor, make sure you know what it takes to use a tool, open an account and close an account before you jump in. More importantly, know what it will cost you at every step of the process.

“Understand any terms and conditions, such as the fees and expenses associated with using the tool or with selling or purchasing investments,” the SEC said. “Ask an automated investment tool sponsor whether it receives any form of compensation for offering, recommending, or selling certain services or investments.”

Understand Limitations Of A Tool Or Product

In addition, understand what assumptions the tool or product makes, and what vehicles they use.

“Be aware that an automated tool may rely on assumptions that could be incorrect or do not apply to your individual situation,” the SEC said.

In other words, if a tool or an online portfolio is built based on certain “economic assumptions,” such as that interest rates will remain low, chances are that if any of those assumptions are wrong, or if things change such as rates rising, the results you get could be very different from what you expected.

Moreover, you might think that with a given online portfolio you can access certain products such as specific ETFs, but later find out that the online tool or service you’re using only picks from a predetermined set of strategies, or from proprietary funds. Know the details.

Think Twice Before Answering Questions

The idea here is that depending on what questions you’re asked—and what answers you provide—you could end up with very different outcomes that either are a result of products that are wrong for you, or that incorrectly assess what your goals are.

Everything from age to investing-time horizon to short-term cash needs to what your financial goals are all play a part in the ultimate asset allocation plan designed for you. If the questions aren’t narrowly focused and your answers aren’t carefully considered, you could end up with an investment plan that fails to meet your needs.

“If any of the questions are unclear or you do not understand why the information is being sought, ask the tool sponsor,” the SEC said. “Be aware that a tool may ask questions that are over-generalized, ambiguous, misleading, or designed to fit you into the tool’s predetermined options.”