What Automated Investing Actually Automates: The 5 Layers

If you've been comparing investing apps and wondering what they actually do for you, here's the short answer: automated investing consists of five layers, and most platforms handle some of them rather than all of them.

The five layers of investment automation are:

1. Getting money into the account

2. Building the portfolio

3. Rebalancing it as markets drift

4. Reinvesting dividends

5. Handling taxes

Knowing which layer is which makes it much easier to tell platforms apart, because the layer you care about most may not be one a given platform supports. If you're struggling to invest consistently at all, you may need something very different from someone managing a large taxable account.

The good news is that five questions are enough when considering any platform, including any that aren’t named here. Here's what each layer covers, how Acorns handles it, and which layers are worth caring about most. 

The five layers of investment automation

Automated investing platforms help with five separate things: getting money into the account, building the portfolio, rebalancing it as markets drift, reinvesting dividends, and handling taxes. Most platforms automate some of these, not all of them.

Here's how each layer breaks down:

Layer 1: Which platforms automate getting money into your account

Getting money into the account is the layer most platforms leave up to you. Nearly every brokerage lets you schedule a recurring transfer, but few will create the contribution for you out of everyday spending, and that's where Acorns stands out.

Automation to fund an account usually comes in four ways:

• Recurring deposits, a fixed amount moved on a schedule you set

• Transaction-based deposits such as Round-Ups®, where purchases get rounded up and the difference is invested

• Paycheck splits, where part of your direct deposit is routed into savings and investing before it reaches your checking balance

• One-time investments you make yourself when you have extra cash

Why the first layer can carry a lot of weight

Every layer below this one works on money that's already in the account. A platform can build a great portfolio, rebalance it on schedule, and reinvest every dividend, but funding is what gives the other four layers a balance to work with.

If the reason you're not invested yet is that you never quite get around to moving the money, this layer could be beneficial for you.

The question to ask any platform is a narrow one: Can it move money in without you deciding to, every single time? Scheduling counts, and so does rounding up. A well-designed transfer screen you still have to open doesn't.

Layer 2: Building and managing your portfolio

Nearly every automated platform builds and manages the portfolio for you, which makes this a common layer that gets covered. The differences show up in what assets are in your portfolio and how much control you have.

Fractional shares mean your recommended mix applies at any deposit size, so even a small contribution spreads across the whole portfolio instead of sitting in cash. 

Target date funds solve a similar problem inside workplace retirement plans, shifting the mix automatically as a chosen year gets closer.

Customization is also where platforms can differ. If you feel ready to try investing yourself, a few apps let you pick and add individual stocks and funds. Custom Portfolios, available on the Acorns Gold plan, let you add individual stocks and ETFs alongside your managed Base portfolio, so you can invest in companies you believe in while keeping your diversified foundation intact. Others may not offer this and aim to fully manage your portfolio.

If you'd like to understand the decision the algorithm is making on your behalf, our guides to asset allocation and how to build an investment portfolio cover it in depth.

Layer 3: Rebalancing your portfolio

Rebalancing exists because as the market moves, portfolios can drift. If stocks see gains for a few years, they end up having a bigger share of your portfolio than you initially chose, and your portfolio ends up taking on more risk. Rebalancing sells some of what grew and buys what saw less gains, bringing you back to your target. Our guide to portfolio rebalancing walks through the mechanics, and if you're curious what triggers an automatic rebalance in the first place, we cover that separately.

Every managed platform rebalances automatically, including Betterment, Wealthfront, Schwab Intelligent Portfolios, Fidelity Go, SoFi Invest, and Vanguard Digital Advisor. Self-directed brokerage accounts generally don't, so if you hold ETFs in a plain brokerage account, you have to review from time to time and make sure your portfolio is still within your target mix.

One thing worth knowing about Acorns: Automatic rebalancing only applies to the Base portfolio. A Custom Portfolio is a non-discretionary account that you manage, so if a stock you picked grows into a bigger share of your holdings than you intended, you decide when to adjust it.

If you'd rather rebalance manually, it’s widely suggested to review your allocation once a year and rebalance when your mix has drifted roughly 5 to 10 percentage points from target.

Layer 4: Reinvesting your dividends automatically

Dividends are the share of company profits paid out to shareholders, and the funds inside a diversified portfolio typically pay them regularly. For the fuller picture, we've written about what dividends are.

Essentially every major automated platform reinvests dividends by default, usually in fractional shares at no extra cost, including Acorns, Betterment, Wealthfront, Schwab Intelligent Portfolios, Fidelity Go, SoFi Invest, and Vanguard Digital Advisor.

Acorns Invest accounts reinvest dividends by default, buying additional shares of your existing portfolio rather than distributing the payout as cash.

Does a dividend reinvestment plan, or DRIP, reinvest the whole dividend?

A DRIP automatically uses each dividend payment to buy more shares of the same investment instead of paying it out as cash. Because platforms can buy fractional shares, every dollar of the dividend gets reinvested.

That last part can matter a lot, because dividend payments rarely divide evenly into a share price. A $9 payment against a $140 share price buys nothing at all if the platform only trades whole shares, so the money sits as idle cash until it builds up into something purchasable. With fractional shares, that same $9 buys about 0.064 of a share right away and starts working for you.

It’s more about how it can compound:

1. A dividend buys shares

2. Those shares pay their own dividends at the next payout

3. Those dividends buy more shares again

Your share count grows without you adding a dollar, and each payout is calculated against a slightly larger position than the one before. Over a few quarters you would barely notice, but over decades it can make a real difference.

Do you pay taxes on reinvested dividends?

Reinvesting doesn't make a dividend tax-free. In a taxable account, a dividend counts as taxable income in the year you receive it whether it lands in cash or buys more shares, and you'll get a tax form either way. That catches many people off guard, because no money ever reached their bank account.

Inside an IRA, including an Acorns Later retirement account, that annual tax event doesn't apply, which is one reason dividend-heavy holdings can sit better in a retirement account than a taxable one. It's also a good reminder that automation doesn't take care of the tax side for you, which brings us to the last layer.

Layer 5: How platforms differ on tax handling

Acorns does not currently offer tax-loss harvesting. Betterment and Wealthfront do, and SoFi does not.

Every platform in this category covers the basics of tax reporting, tracking your cost basis and sending the forms you need at filing time. What separates them is whether they act on taxes during the year instead of only reporting on them afterward, and that comes down to two things: tax-loss harvesting and account placement.

If you have a large taxable account and harvesting losses is what you're looking for, Betterment and Wealthfront both automate it. Our comparison of Acorns compared with Betterment and Wealthfront covers how the platforms line up, including on cost.

The rule that makes harvesting complicated is the wash-sale rule, which doesn’t allow a loss if you buy a substantially identical asset within 30 days before or after the sale. Automated harvesting programs are built around that window, which is part of why it tends to be a full feature rather than a setting you turn on.

Two things are worth knowing before you consider this layer:

• Tax-loss harvesting only applies in taxable accounts, so losses inside an IRA can't be harvested, 

• If most of your investing happens in retirement accounts, the feature won't do much for you

Its value also scales with balance, since platforms that offer it generally suggest it starts to matter somewhere around a taxable balance of over $25,000.

The other half of tax handling is account placement, meaning which account type holds which asset. Assets that generate a lot of taxable income are generally better held in tax-advantaged accounts, while assets that don't are fine in a taxable one. Acorns organizes accounts by purpose, with Acorns Invest for everyday goals and Acorns Later for retirement, so placement stays a decision you make. Tax situations vary quite a bit, so a tax professional is the right person to ask about yours.

Set it and forget it: what automated investing doesn't do

Automation handles execution, but even a well-automated portfolio leaves four things up to you.

It won't remove market risk. An automatically rebalanced, fully diversified portfolio still falls when markets fall. Diversification manages risk without eliminating it.

It won't decide how much you should invest. Every platform will take whatever you give it and manage it well, but none of them will tell you the amount is too small for the goal you have in mind.

It won't handle complex planning. Estate planning, business income, and multi-state filings are the situations where a human advisor earns their keep. The SEC’s investor bulletin on robo-advisers is direct about what an algorithm can and can’t account for, and FINRA’s report on digital investment advice covers how these tools are supervised.

It won't stop you from withdrawing at the wrong moment. One of the most expensive decisions most investors make is selling during a downturn, and no platform can automate that away.

None of this is a reason to skip automation. It's a reminder that automation does the parts it is good at, but there’s also parts that can only rely on you.

Automated investing vs. passive investing: are they the same?

Automated investing and passive investing are related, but they aren't the same thing. Passive investing describes what you own, meaning funds that track an index instead of trying to beat it. Automated investing describes who executes the decisions.

Most automated platforms happen to be passive, because they build portfolios out of index-tracking ETFs. The two can still come apart, though. You can invest passively by hand, buying index funds yourself and rebalancing on a spreadsheet, and automation can just as easily run an actively managed strategy. When people compare active vs. passive investing, they're asking about fund selection. When they ask about automation, they're asking about who does the actual investing.

Which layers of automatic investing matter most for you

There's no single right answer here, because the layers aren't equally valuable to everyone. A simple way to think about it is to start with where you are right now:

• If you're not investing consistently yet, Layer 1 is the one that matters. A portfolio you never fund is an empty account, no matter how well it's built.

• If you're funding steadily but unsure what to hold, Layers 2 and 3 do the work you would otherwise have to learn to do yourself.

• If you've been invested for a while and your balance is growing, Layer 4 is compounding in the background, and it's worth confirming it's switched on wherever you hold money.

• If you have a large taxable account, Layer 5 becomes the deciding question, and it's worth shopping for specifically.

For most people getting started, the first three layers carry the most weight, and are also the ones Acorns handles from day one. You get an expert-built, diversified portfolio, automatic rebalancing, and funding tools like Round-Ups® and Recurring Investments that keep money moving in without daily decisions.

If you're weighing several apps against each other, our guide to how to choose between automated investing apps takes it from there. And to see how small automatic investments could grow over time, try our compound interest calculator.

Ready to begin? Start investing with Acorns.

Frequently asked questions

Does Acorns rebalance your portfolio automatically?

Yes, Acorns automatically rebalances your Base portfolio to keep it aligned with your recommended asset allocation, including inside a Traditional, Roth, or SEP IRA through Acorns Later. Custom Portfolios work a little differently, because a Custom Portfolio is a non-discretionary account you manage, so you decide when to adjust the individual stocks and ETFs you've chosen.

Does Acorns reinvest dividends automatically?

Yes, Acorns Invest accounts reinvest dividends by default, buying more shares of your existing portfolio rather than holding the payout as cash. Keep in mind that reinvested dividends in a taxable account are still taxable in the year you receive them.

Does Acorns offer tax-loss harvesting?

No, Acorns does not currently offer tax-loss harvesting. Betterment and Wealthfront both automate it on taxable accounts, and SoFi does not offer it either. Tax-loss harvesting only applies in taxable accounts rather than IRAs, and its value generally scales with the size of your balance.

Which layers of automation matter most for a beginner?

Funding can matter a lot. When you are starting out, other layers can only start if money reliably arrives in the account, which makes tools like recurring deposits and Round-Ups® a great area to prioritize. Building the portfolio and rebalancing comes next and usually requires a deeper look at where you currently are financially, and the money goals you are trying to achieve. Tax-loss harvesting is usually least relevant early on, since it only applies in taxable accounts and matters more at larger balances.

Is automated investing the same as passive investing?

They're related, but aren't the same thing. Passive investing describes what you own, meaning funds that track an index instead of trying to beat it, while automated investing describes who executes the decisions. Most automated platforms build passive portfolios out of index-tracking ETFs, though you can invest passively without any automation, and automation can be applied to an active strategy.

How does dividend reinvestment work?

A dividend reinvestment plan, or DRIP, automatically uses each dividend payment to buy more shares of the same investment instead of paying it out as cash. Because platforms can buy fractional shares, every dollar of the dividend gets reinvested. Those new shares then pay their own dividends at the next payout, which buys more shares again, so your share count grows over time without any additional deposits.