Every industry has a catchphrase that explains it all. For the tech business, one of the better quotes you hear is that “software is magic.”
There’s a lot to unpack there, but serious investors should think of software as the ultimate high-efficiency tool. It really is magical to have the kind of investing power that once only elite investment funds employed.
Consider for a moment the simple index fund. It’s just a collection of investments, right? But under that is software that tracks hundreds, even thousands of investments, and keeps them weighted correctly for the fund’s goal, which is to accurately track an entire stock market index.
You could not do this any other way expect by using software. Just imagine the work involved in trading, clearing and rebalancing hundreds of stocks every day by yourself!
Now consider that the best retirement portfolio is one that has a multitude of investment types — stocks, bonds, foreign securities, real estate and others. Index funds not only keep each asset class on track but in combination they can be adjusted to your personal level of risk tolerance.
Now software is edging into what used to be an entirely human domain, measuring risk.
Risk comes in two very different flavors: market risk and behavioral risk. It’s pretty easy to manage market risk. If your investments must be liquidated in the short- to medium-term, your portfolio should own less stock and more income-producing investments and cash.
If your income needs are farther out, say 10 years or more, then stocks are the better choice, since that’s where you get inflation-beating growth. The price of that outcome is volatility, the up and down movement of stocks in any given time frame.
Thus we run into the second problem, which is behavioral risk. If you can manage to “turn off” the stock market in your mind and go about your day, this kind of risk disappears.
Most people can’t. They try to ignore their investments, but the media makes sure they pay attention, usually only after markets fall sharply. That sets off a cycle of engagement that grows more frantic until the emotional investor feels that immediate action is required.
Usually, taking action is a huge mistake. Selling at a low point means locking in permanent losses that cannot be recovered. You feel better because the bleeding has stopped, then stocks recover and you feel immediately worse.
Again, software saves the day. Running a portfolio with online software allows you to better understand how the ups and downs of the market are actually opportunities in disguise. Rebalancing your investments give you a chance to realize gains when they happen and reinvest them in a timely fashion.
Over the years, that simple, repetitive action is what makes a portfolio thrive and compound into a truly great retirement.
By eliminating the drudge work and removing the risk of emotional trades, software gives you peace of mind and power over the randomness of investing.
It’s magic that anyone can use to be a better investor and retire without worry.