Investing as a way to grow capital is certainly nothing new. But the old-school way of investing – paying a guy in a suit to pick and choose investments for you – is no longer the only option when it comes to building an investment portfolio.
The era of digitalisation has brought with it a whole new world of investment methods, which are proving to be an invaluable complement to more conventional investing strategies.
Passive strategies like Exchange Traded Funds (ETFs) have already won the hearts and minds of savvy investors as a cost-effective, stable way to invest over time. Now algorithmic trading, AKA algo trading, is set to revolutionise modern investing.
ETFs are the talk of the town
A 2020 ASX study revealed that 28% of Australian investors planned to invest in ETFs that year, signalling an increased appetite for digital, easily accessible and user-friendly investment options.
Most everyday investors today recognise that they can’t compete with the likes of hedge funds and big banks. ETFs offer an alternative way to enter the investment market and earn passive income without having to pick stocks or pay a traditional fund manager to pick for you.
They also generally come with lower fees compared to other investments, so it’s easy why investing in ETFs in Australia is growing in popularity. But as we’ll explore below, ETFs aren’t the be-all and end-all of modern investing.
Diversification is your friend
Diversification is a fancy way of saying ‘Don’t put all your eggs in one basket’, and it’s best practice for most everyday investors. Essentially, diversification lowers your portfolio’s risk to help generate more stable returns over time.
There are a couple of ways to diversify your investments:
- Invest your money across different asset classes like shares, property, bonds and private equity
- Choose different options within an asset class, for example buying shares across a range of industries such as tech, healthcare and resources
Because ETFs are designed to track the performance of a group of assets, they’re diverse by their very nature. This means, in most cases, they’re a relatively safe and stable way to invest.
But what if you seek a diverse investing strategy with an automated component?
Enter algorithmic investing
Algorithmic investing means using a computer program (an algorithm) to execute trades automatically based on a set of rules and analysis of real-time data. This removes almost all manual intervention involved in trading.
Because algorithms never sleep and don’t get caught up in biases like us mere mortals, they have the potential to outperform more traditional investment strategies.
Alongside passive investment strategies like ETFs, algorithms may capture returns by using other sorts of strategies, like shares that have momentum or are trading at fairly moderate valuations. So the two go hand-in-hand and have the potential to form a diverse investment portfolio which generates returns.
Resilience is key
Whatever your investment portfolio and strategy looks like, it’s worth paying attention to how your fund is performing over time – and how the fees compare with other investment funds. You can compare the performance of funds here.
Algorithmic investing is set to give everyday investors more choice when it comes to building a diverse investment portfolio – and the potential to capture returns alongside those generated through other passive strategies such as ETFs.
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Products issued by Melbourne Securities Corporation (MSC). Please consider the PDS and TMD available on our website before applying. All investments carry risks and you may lose your money. Past performance is not indicative of future performance. The information in this report has been compiled from sources we believe are reliable and we make no warranty in respect of its accuracy.