One of the
earliest Robo Advisor firms began in 2008. I first learned of computerized
investing some seven years later and opened my first account in 2016. The
information for this article will focus on two robo portfolios that were
launched in September of 2017 with two different firms. The primary motivation
for this experiment is related to an article I wrote for Seeking Alpha
in November of 2014. The article asked the question, Who Will Manage The Family Portfolio
When I Die? Turning the family assets over to a Robo Advisor is
certainly one option.
While I
began with one well established robo firm in 2016, I am no longer with this
organization as they raised their fees by 67% for accounts over $100,000. That
increase seemed excessive for an computer managed portfolio so I closed the
account and opened two different robo accounts. I'll describe them as Portfolio
A and Portfolio B.
Portfolio A
is with a firm that charges no fees for managing the portfolio. They make their
money by using their own ETFs and by holding more cash than I prefer. The
second firm, Portfolio B, does not charge a fee for accounts below $10,000 so I
keep this account very small so as to avoid fees.
Initially,
both portfolios were set up to be 100% invested in stocks. Shortly before the
recent correction, I requested an adjustment in Portfolio A to move from 100%
in stocks to a stock/bond ratio of 70%/30%. Portfolio B is still invested 100%
in stocks or equities.
Performance: The key
questions is, how have these portfolios performed vs. a benchmark from
9/30/2017 through 10/31/2018 or thirteen (13) months. While this is a short
period, one gains a glimpse of what one might expect from computerized
investing.
Portfolio A
had a 1.26% return over the 13 month period while Portfolio B lost 1.93%
(-1.93%) over the same period. Until I changed the stock/bond ratio in
Portfolio A, the portfolios ran neck and neck. The recent correction, and the
move to a 70%/30% equity/bond ratio caused the return diversion between the two
robo portfolios. I use the Vanguard 2030 Target Index Fund (VTHRX) as the benchmark. Over this same 13 month period
the return for VTHRX is 1.51%. While neither robo portfolio topped the VTHRX
benchmark, Portfolio A comes in a close second.
Going back
to July 31, 2018, both robo portfolio were outperforming the VTHRX benchmark.
Performance results depend on what time period one selects for comparison.
Both A and
B firms do what we call tax harvesting. At the end of the month ETFs that are
below their purchase price are sold out of the portfolio and replacement ETFs
are purchased to fill the asset class. In rising market conditions there are no
transactions.
When both
portfolios are examined in detail, the reason neither is outperforming the
benchmark is due in large part to both portfolios holding approximately 20% to
25% in developed international equities and emerging market equities. Both
international asset classes have under-performed over many months and this
accounts for the lag compared to the benchmark. I find the computerized
investing is agnostic to market movement in particular asset classes. Each firm
sets its own Strategic Asset Allocation plan depending on the requested
stock/bond ratio and all investment decisions follow that ratio.
Pros and
Cons: A primary benefit is that one is completely free of any
management decisions. This is ideal for someone who is not interested in
investing, yet wishes to participate in the stock market. When setting up an account,
answer a few questions and deposit the money. That's it. Very simple to
accomplish. Since I am retired, my age automatically pushed me into a more
conservative stock/bond ratio. I had to force the system to let me allocate
100% to equities. This may require a personal phone call instead of following
the on-line advice. Both firms I use are set up to integrate with TurboTax at
tax time.
One of my
primary complaints has to do with firm A where cash is 7% to 8% of the
portfolio. This is too high, particularly when the market is moving up. Cash is
a drag in a bull market. I've not been able to solve this problem as I think
the firm uses available cash to their advantage.
I plan to
continue to maintain robo portfolios as they form a type of benchmark for other
portfolios I manage using different investing models. Without going into
detail, these alternative models are performing better than the robo portfolios
in nearly all cases.
When
checking out robo firms, pay close attention to fees. If you pay much attention
to the account, take into consideration how the statement looks. Firm B, in my
case, does not provide easy to read statements, whereas Firm A does have easy
to read statements. The very first firm I worked with also had easy to read
statements.
Do online
research on Robo Advisors and then invest the minimum amount with several firms
so you can check out real money results. My experience with three different
firms is that all are friendly, straight forward, and easy to establish
accounts.
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