The Rise of Robots (I Mean, Robo-Advising!)

You log into your investment account.

You notice a couple of trades.

“But wait?! I didn’t trade anything!”

No, you didn’t. But the machine did.

We love controlling our lives and believe we are the best at it. But we are human, and we can act irrationally.

It’s time to put down your mouse and let the computer do the talking, I mean, transacting.

Robo-advising may be new to the investment world, but computers have been taking over our lives for a while now. And for the better.

Fun Note #1:

In his book, The Psychology of Money, Morgan Housel, a former investment banker, argues that the most important factor in investing is not IQ or financial knowledge, but emotional discipline. He shares stories and anecdotes that illustrate how our emotions can sabotage our investment returns.

When I was younger, my father called his broker and placed orders to buy or sell securities in his investment account. (I can only imagine the fees. Eeek!)

But now, you don’t have to call anyone, you don’t have to even hire anyone. You simply hire a computer. And for WAY LESS MONEY (more on this later).

Robo or Robot?

There are several companies out there now that offer robo-advising services. Betterment, Wealthfront, and now even Vanguard (yes, Vanguard) offer robo-advising services. This is where you sign up for an account, answer questions that signify your risk tolerance/profile, and out comes a potential mix of investments based on your answers.

Now, this isn’t 2001: A Space Odyssey, but their system will invest the cash you deposit according to your specific risk profile. As the market moves, the system will sell or buy securities to match that plan.

[Disclosure: I’m a client of Wealthfront and use their robo-advising services.]

My particular risk profile is VERY AGGRESSIVE. It’s not for everyone, but for me, it works. I figure I have lots of time to work and likely won’t retire for the next 20+ years. Here’s my account snapshot:

my Wealthfront account snapshot

Every time I deposit more cash into this account, it analyzes the current portfolio I have and then trades according to my risk parameters. Done! (It even reinvests dividends on my behalf.)

Fee Me

If you guessed that a computer is cheaper to service than a human, you’re right. For my robo-advising account, I pay 0.25% annually of the total assets in the account, deducted monthly.

So, if my account is $50,000, then take that figure and multiply by 0.0025, and you get $125. Divide that number by 12 (months per year), and you get approximately $10.41 per month.

Some advisors may charge more than 5x that amount! Yikes.

Fun Note #2:

In his book, Thinking, Fast and Slow, Daniel Kahneman, a Nobel Prize-winning psychologist, argues that humans are prone to making irrational decisions, especially when it comes to money. He cites the example of investors who sell their stocks after a market crash, even though this is the time to buy.

A Theatrical Performance

You may inquire about how good the system actually is. A recent study found that actively managed mutual funds, which are those that are picked by humans, underperformed their passively managed counterparts, which are those that track a market index, by an average of 0.75% per year over a 15-year period.

Speaking from personal experience, I started my account at the beginning of 2018, and since then, the account is up 45%! Of course, the market has also risen, aiding my aggressive nature. (My side account of individually-selected stock picks is down about 50%!)

But the real goldmine is tax loss harvesting. The system continually scans my account, looking for things to sell at a loss, and simultaneously replace with a like-minded security. Why does it do this?

To save on taxes! Yup, my account has saved me over $1000 in taxes alone. The current tax code allows anyone to deduct up to $3,000 in capital losses and use that offset ordinary income. This more than covers the management fee. And it does it all in the background. I don’t even have to enable that function. It simply does it and I reap the benefits!

Fun Note #3:

In The Intelligent Investor, Benjamin Graham, the renowned investor and teacher, emphasized the importance of staying calm and rational in the face of market volatility. He argued that investors should focus on long-term investing and avoid making emotional decisions.

I could go on and on. But the point is I don’t fret about the markets. I don’t care to follow the day-to-day silliness of what stock is up/down or what my portfolio is doing. I have more free time to think, read, go for walks, exercise, and focus on the daily things that matter to me.

Sure, my investments matter, but I’ll pay a computer to do the transacting and saving for me.

Save On,

Chris