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Are robo-advisors better than human advisors?

Contributing to your HSA offers three possible ways to save money on taxes, and investing your HSA balance may provide growth of these contributions over time. But did you know that robo-investing can make it virtually hassle-free?

It’s nearly time to say ‘goodbye’ to 2021. That said, your list of New Year’s resolutions is likely already underway. If you’re anything like us, this list includes ways to improve your finances. The top money resolutions may be saving more, spending less, and paying off debt, but you may also be looking for ways to invest more money in 2021.

While boosting your 401(k) or IRA contributions is an easy choice, be sure not to skip out on contributing to your health savings account (HSA). Funding your HSA offers three ways to save money on taxes, and using an artificial intelligence (AI) investing tool, AKA a “robo-advisor,” takes out much of the hassle from investing those funds. Here’s what to know about this option. 

What is a robo-advisor?

Over the past decade, robo-investing has become a popular choice for beginners without a lot of money to invest. Robo platforms use the power of software automation to create diversified investment portfolios. Robo-advisors start by asking questions to learn about your financial goals, risk tolerance, and timeline. The software then uses an algorithm to invest your money accordingly. 

Some of these basic investing questions may include:

  1. What are your goals for investing?
  2. How long until you need the money (time horizon)?
  3. How do you feel about stock market swings (risk tolerance)?

Robo-investing typically uses passive investments, like index funds or exchange-traded funds, also known as ETFs. These passive funds may include all, or a good relative sample, of a stock market benchmark, like the S&P 500. 

Rather than trying to beat the benchmark, a passive fund will strive to match its performance or perform just as well. Passive fund managers often opt for a buy-and-hold approach vs. frequent trading, and with fewer transactions, a passively-managed fund is typically less expensive.

This strategy is different from active management, which relies on a portfolio manager or team to handpick stocks or bonds to outperform a benchmark. Active management is typically more expensive because these funds have more analysts and portfolio managers and include more buying and selling than passive funds. 

How robo-investing may beat humans

There’s an ongoing debate in the investing world about whether passive or active investing is the better choice. Some investors swear by less expensive, passive investments, while others prefer higher costs for the chance of earning higher returns.

“...investing doesn’t have to be an either-or scenario, and many financial advisors use a mix of both passive and active strategies with their clients.”

Finance media has been a cheerleader for passive investing, and it’s easy to see why. With billions of dollars moving from active to passive funds, and 90% of active portfolio managers underperforming their benchmarks, many investors have declared passive investing the winner in the ongoing passive vs. active investing debate. 

But the truth is, investing doesn’t have to be an either-or scenario, and many financial advisors use a mix of both passive and active strategies with their clients. Some folks are willing to pay higher fees to possibly earn higher returns or have some extra protection when the stock market tumbles.  

However, if you’re new to investing, have less money, or don’t want to work with a financial advisor, passive investing could be an excellent strategy. Although many investors feel confident they can beat stock market returns, most folks are better off with a hands-off strategy like robo-investing. Here’s why: this study shows that buy-and-hold investors typically outperform frequent traders. (Less trading is one of the reasons why women investors tend to earn higher returns, according to a 2017 Fidelity study.)

Plus, you can rely on automation for monthly HSA contributions. Savings automation, like your monthly 401(k) contributions, is a proven tactic to save and invest more money every month. After all, without easy access, it’s tougher to spend your money. 

How to leverage robo-investing in your HSA

If you’re ready to start investing the money in your HSA, but not sure where to begin, Starship’s robo-investing feature may come in handy. 

Here’s how it works: You can sign up to start investing your HSA from your Starship app within a couple of minutes. Before getting started, we’ll ask a few questions about your risk tolerance to learn about your investing style and financial situation. After the software records your preferences, it will recommend a portfolio for you based on the information provided.  If you approve, you can start making contributions—and that’s it! 

Like other accounts, you can track your progress over time, and there’s always the option to adjust your preferences in the future. But for now, you can let our software do the heavy lifting for you. 

When to skip robo-investing in your HSA

While investing your HSA balance is potentially an excellent way to grow your money, it may not be the right move for everyone. If you have a need to pay qualified medical expenses in the near future, or if you just aren’t comfortable with investing, it may be better to keep your funds in your spending account to cover your expenses.