Many investors cannot beat the market, regardless of whether it is with frequent trading or any other strategy. So instead of chasing this fantasy, regular investors should leverage the technology to correct for their innate flaws.
Technology has a big potential for investors and if used wisely, it could improve the returns on investments far from managing pensions, buying and selling of insurance and handling other investment portfolios.
A new era of the digital world is being realized worldwide. Technology has transformed finance. Customers can now bank and buy their insurance policies online. They also use innovation for a variety of other reasons.
Why Investors Should Utilize Technology
Admittedly, costs take a much smaller chunk out of long-term results, particularly when trading is cheaper. However, technology gives fund managers a better platform to replicate stock market indices as well as diversifying their equity portfolios for a fraction of a percentage point in annual fees.
But the ease and cheapness of trading, along with the vast range of options available, create a terrible temptation. Worldwide there are nearly 7,400 exchange-traded funds (ETFs) and related products.
These funds are not used only by “buy and hold” investors. Majority of the traded securities on stock exchange markets, by value, are ETFs.
There are elite investors who make a virtue of incessant trading, with a remarkably short holding period for shares.
These professionals can use computers to crunch data faster than anyone else and to exploit small differences in securities prices. Clearly, in such a case, everyone is incessantly improving their infrastructure and their algorithms to get an edge on the competition.
Apparently, one thing remains unchanged. Many investors cannot beat the market, regardless of whether it is with frequent trading or any other strategy. So instead of chasing this fantasy, regular investors should leverage the technology to correct for their innate flaws.
Picture this, a lot of individuals underestimate how much they need to save to meet their long-term needs. Challenges in calculations are among the reasons. It calls for people to make assumptions about longevity, inflation and future investment returns. The natural human inclination also drives some to spend money today rather than to save for a distant, and uncertain, future.
That is where the problem lies and most people, particularly those approaching their retirement age get discouraged from saving due to the financial crisis and other factors. Luckily, technology can be used to tackle this issue.
Retirements and Savings
If a government defines a good statistical model, it can enable individuals to know what pension pot they will need at retirement; what investment return they can reasonably expect; and whether they are on track for the target.
If they find they are falling short of their goal, investors can save more or adjust their planned retirement date. Just being aware of the scale of the task can make investors change their behavior.
Another way technology can help investors is by choosing a strategy that avoids incessant trading. Investors can easily make an arbitrary selection of assets in their 20s and never change it, or relentlessly fiddle with their portfolio.
Too many people fall into the trap of enthusing over fashionable sectors or hot mutual funds. If a sector is in vogue, it has already risen in price, so it is quite likely to be expensive relative to its history. By the same token mutual funds become hot because of their past performance, but there is very little evidence of persistence in returns.
In short, investors should view technology as a tool to encourage the behavior (the investment equivalent of exercising more and eating less) that will lead to long-term success. Think of fintech as one of those step-counting apps, nagging you to financial fitness.