In his 2016 shareholder letter, Warren Buffett devoted a lot of space to arguing that individual investors shouldn’t try to invest like he does. They shouldn’t use mutual funds or individual stock picks to try to increase their returns. Individuals should invest in low-cost index funds, according to Buffett.
Not every agrees. In a CNBC interview, the head of robo-advisor firm Betterment argued that his firm’s tools will beat indexes after expenses. Using the firm’s tools to reduce taxes in taxable accounts and be sure assets are held in the right type of account will increase returns plus other benefits will increase wealth without any effort by the investor.
Robo-advisors can create portfolios that are more diversified than an S&P 500 fund. Most of the automated services build their portfolios with low-cost index funds that invest in U.S. and international stocks and bonds as well as real estate and commodities.
When customers sign up with a robo-advisor, they are usually asked a series of questions to determine their risk tolerance. Based on how people answer those questions, a portfolio of funds is constructed. Returns for those portfolios can vary widely, depending on the robo-advisor’s investment strategy and the funds they use.