Advances in technology are changing the investment industry in many ways. Right now there’s a lot of buzz around the FAANG stocks in the US (Facebook, Amazon, Apple, Netflix, Google) or the WAAAX stocks here in Australia (Wisetech, Afterpay, Appen, Altium Xero).
Acronyms aside, there’s clearly a major focus on how you can invest in the changing lifestyles of the future.
But technology is helping investors in ways that go far beyond these examples. It may not be as exciting as watching a virtual reality fashion parade before buying the clothes straight from your phone, but I believe one of the greatest benefits created by technology is simply increasing transparency and lowering costs for investors.
Why is this so relevant when it comes to investing?
Transparency makes it easy to compare your investments with other options. Transparency also allows you to determine if the fees you’re being charged are reasonable for the service you’re receiving. If you don’t know how much you’re paying in fees, there’s usually a reason the fees are being hidden – chances are, someone doesn’t want you to know!
The same goes for performance – fund managers don’t always make it easy for you to easily access information about how your investments are performing. The annual SPIVA report, which compares index (passive) with active investment management, continues to show that year after year, most professional active fund managers underperform their benchmark. This is leading to a serious shift away from active management (stock picking) toward passive investments such as exchange-traded funds (ETFs).
If you’re an Australian investor and you’re frustrated with continually overpaying for underperformance, you could consider moving your money to an investment solution with lower fees. Lower fees doesn’t mean lower performance either – in fact, it’s usually the opposite.
An annual saving of 1 per cent in your investment management costs may not sound much, but in a superannuation account with a few hundred thousand dollars in it, the compounded savings over a decade can easily turn into tens of thousands of dollars.
Investing overseas to diversify your portfolio used to come with a lot of complexity, including currency conversion, foreign tax legislation and expensive trading costs. Technology has opened up new investing options such as low-cost ETFs that give you the ability to access global investments at a fraction of the time, effort and costs that you would have needed in the past.
ETFs are growing in popularity each year – there are now more than 200 ETFs listed on the ASX and they’re all slightly different, so it can be hard to determine one ETF over another. Robo-advisers can help by creating and managing a diversified portfolio of ETFs that match your investment profile and appetite for risk – another benefit of technology!
Technology can be exciting, whether it’s advances in medical science, self-driving cars, space travel or cryptocurrency. But don’t confuse investing with entertainment. The reality is, often the best investing is boring! The improvements technology has delivered to investors through lower fees and increased diversification are so valuable to all investors.
To be fair, these may not elicit the same excitement at a dinner party as a new company emerging from Silicon Valley. However, whether you have a self-managed super fund or you’re putting aside an investment for a child or grandchild, don’t underestimate the difference a 1 percent improvement can make. As Bill Gates once said: “Most people overestimate what they can do in one year, and underestimate what they can do in 10 years.”
IMPORTANT LEGAL INFO This article is of a general nature and FYI only, because it doesn’t take into account your financial situation, objectives or needs. That means it’s not financial product advice and shouldn’t be relied upon as if it is. Before making a financial decision, you should work out if the info is appropriate for your situation and get independent, licensed financial services advice.