Should we use Robo-Advisors? I don’t know, let’s ask Siri!

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Any web search for “robo-advisors” (or robo-advisers, robo-planners, etc.) produces an interesting spectrum of content, from “for” to “against,” with a fair share of “undecided.”

Some posts are ready to embrace new technology. See Robo Advice? Bring it on, it will be great for business by Tony Vidler. He says robo-advisors:

will be good for business for those advisers who provide real value and are smart marketers. The Robo’s will probably kill off the bottom-feeders in the business, together with those who have no genuine advice-based value proposition. Perhaps that is an unfortunate consequence, but then, maybe it isn’t.

We also like Neil Wood’s post “Are You Prepared For the Tidal Wave Of Assets Going Into Robo-Advisor Programs?” He says:

Remember the stock jockeys of the 1970s-1990s that refused to embrace financial planning? Many call them dinosaurs that died with a change in the way our industry did business. There will always be new competitors in our industry. People want faster, cheaper, better, improved, more powerful and a so-called better mousetrap.

But many posts are threatened by new technology. For example, the title alone in the post by Sara Grillo puts robo-advisors in a derogated status: Why a Robo-advisor is Like Getting Financial Advice at a McDonald’s Drive Through. More on Ms. Grillo in a minute ….

Here is another, where the title of the article by Craig Iskowitz sounds as if he thinks robo-advisors are a passing fad: Dead Robo Walking: Why Wealthfront is Doomed. However, he provides real analysis of the new technology and differentiates the growing field of robo-advisors, calling out Wealthfront as an advisor he believes failed to prepare and execute well. Wealthfront may not do well, but Mr. Iskowitz sees it as losing out to other investment firms, both robo or traditional. (Also see Robo-Advisors may be just what we need!)

Finally, there are some who purport to be threatened but may in fact be carving out their own turf in the robo-advisor space. Ron Lieber believes that is what JP Morgan is doing. See “Jamie Dimon Wants to Protect You From Innovative Start-Ups.

As I said in What is a financial plan?, that those who insist that robo-advisors will not replace individual, human planners comprise the “There’s no app for that” group.

Hold on, Steven. This is Siri. What about me? Where do I fit in?

Well Siri, you are a robo-voice, not an advisor.

But you ask me questions all the time!

Yes, I do. But I don’t count on you for life-changing decisions!

I’m hurt!

Enough! As promised, back to Sara Grillo. In the end, she thinks robo-advisors “are a good way to get financial advice for those who have no emotion attached to their money, a long time horizon, and simple requirements.” However, if you need more attention, then she expects you to pay a human for advice, despite the $500,000 portfolio minimum threshold barrier.

Should that be the cutoff? You have to already be wealthy to get good advice? We think it shouldn’t.

Imagine that, as a financial planner, CFP or other advisor, robo-advisor technology frees up more of your time. You could use that time to provide more advice to clients or to advise more clients. Just like the introduction of word processing and desktop computers in offices decades ago, technology brought efficiencies and created a massive shift in how we use time.

Or Imagine that we can create a robo-advisor website that will provide the sort of advice that a human would, even encompassing the issues Ms. Grillo suggests: “complicated trust and estate issues, a need for cash flow planning.” This is my hope for the website we are building, that we can make the essence of human financial planner advice accessible to those who made need it most, who have not amassed great wealth – yet.

Technological change comes in many forms and constantly evolves – that is a constant in our lives. Those who resist are often buried in the process – Neil’s dinosaurs. Those who would adopt and adapt fare far better.

Don’t you agree Siri? Siri?

I’m not talking to you until you apologize

Oh boy.

China’s economy, the stock market and politics


(worried about investing?)

So far this year, checking your investment account balances could lead to an upset stomach, or worse. You are better off watching the historically unusual 2016 presidential campaigns. That way, you have enough to distract you from making a bad investment decision … even if Donald Trump or others upset your stomach.

What would a bad decision be? Here are several worries you may have, stated as “oh no,” along with a description of the potential bad investment decision:

“Oh no, stocks are too risky, I’m moving my money over bonds instead” – a.k.a., changing your portfolio allocation

If you (and your advisors) constructed a good long-term portfolio, then stick to the allocation in your portfolio. At present, the return on most bonds is less than the rate of inflation, after income taxes. The return on money markets is even less. So, unless you have amassed huge sums, you need the stock market returns to reach your financial goals.

That means you have to stay in stocks, and ride out the current downturn.

“But does that work?”

Let’s take the last big market dive of 2008 as an example. Measuring stock performance from 2008 through 2012, “the S&P 500 generated a cumulative return of 8.6 percent.”   See Went to Cash? Here’s the next Big Mistake You’ll Make.

Have you seen any bonds paying 8.6%?

“No.”

I didn’t think so.

True, there are alternate investments, such as hedge funds, precious metals, commodities and raw materials, which could perform better than bonds. However, each has different risks and expenses, and some of these have high barriers to entry. If any of these investments do belong in your portfolio, they are there to balance your other investments, which must still include stocks.

“Oh no, investing is too risky, I’m putting my savings in cash for now” – a.k.a., attempting to time the market

Pulling out of the market when it goes down and then putting all that cash back in just before it goes back up sounds great. However, the problem with market timing is no one can do it. Looking at 2008 through 2012, “If an investor missed the 36 percent drop in the S&P 500 in 2008 — or even worse, bailed on the markets mid-carnage — they probably also missed the 26 percent gain in the S&P 500 in 2009, and the next three positive years for the index that followed. See Went to Cash? Here’s the next Big Mistake You’ll Make.

So, you are thinking that 2008 to 2012 is an aberration.

“Yes, I still want to move to cash.”

 Then consider 1970 to 2016, where, if you missed just the best 25 days out of 11,620 trading days, “your returns would have gone from 1,910% to 371%, or [from] 6.7% a year to 3.4%. To give you an idea of how lousy that is, 1-month U.S. T-bills returned 4.9% over the same period.” See How missing out on 25 days in the stock market over 45 years costs you dearly.

The challenge of timing the market is capturing the best days. However, Nobel laureate William Sharpe “found that market timers must be right an incredible 82% of the time just to match the returns realized by buy-and-hold investors.” See Why you should stay in the stock market.

Are you that lucky?

“No.”

“Oh no, China is a total mess, this time is different, I’m am getting out of stocks forever” – a.k.a., attempting predict the future

True, the slowing of the Chinese economy is causing economic problems worldwide. But, in terms of the impact on stock markets worldwide, that is not dramatically different from the 1987 crash, only then it was Japan.

“Yes, but my friends are selling stocks …”

Did you know that the individual investor is a contrary indicator for the stock market?

“What does that mean?”

Historically, when individual investors are selling, that is a market low, a good time to invest. Similarly, when individual investors are putting everything into the stock market, that is a market peak and a time to sell the over-priced stocks.

By the time you realize that you are mistaken, you will have missed much needed performance. For emphasis, consider this:

From 1990 to 2005 a $10,000 investment would have grown to $51,354 had you just sat tight from beginning to end. However, if you had missed the best 10 days in that 15-year period, your returns would have dwindled to $31,994; if you had missed the best 30 days, you’d be looking at a mere $15,730. Why you should stay in the stock market.

Oh no, investing is too risky, I put my savings in cash” a.k.a., thinking short-term, another argument for going to cash

he stock market has to be risky, otherwise there would be no reward for investing.

“But I like cash!”

Cash is not volatile, but it is still “risky” – the return on cash – the interest earned – is less than the rate of inflation. Over time, investing only in cash puts you far behind, while long-term investing reduces the risks of stocks. The key is, you have to withstand the downturns to gain from the upturns:

A study by SEI Investments reviewed all the bear markets since World War II. According to the study, reported in The Wall Street Journal, stocks rose an average of 32.5% in the 12 months following the bear-market bottom. Yet, if you missed the bottom by just a week, that return fell to 24.3%. Waiting three months after the market turned cut your gain to less than 15%. Why you should stay in the stock market.

“Oh no, I need money to buy a house” – a.k.a., having the wrong investment strategy

What was your short-term investment doing in the market in the first place?

“I need my money to double so I can buy my dream house!”

Sorry, if you need that much then your dream is wrong.

For the stock market, anything less than 5 years is “short term.” If you have money set aside for a vacation, new car or other major purchase, like a house, those funds need to be invested more conservatively, taking less risk. Otherwise, while you could double your money in a couple of years, you could also end up with much less.

“Oh yes!” a.k.a., the conclusion, an important message – don’t forget it:

After watching investors for several decades, I know this to be true: you must create a good investment strategy and stick to it for it to work.

Even if do not have an optimum strategy, your investments will perform far better than someone who keeps altering their strategy.

“But the fund I have didn’t do as well as another fund last year, so I am selling ….”

Chasing after the last year’s star mutual fund usually works out poorly. You sell your current fund, paying fees and taxes, to buy the star fund, only to watch its performance return to the mean. Disappointed, you then sell the new star fund to chase another star performer, only repeat the same mistake with fees and taxes. After you repeat this a few times, you could end up with negative returns while someone who simply a bought and held a mediocre fund will have substantial gains.

If your investment strategy is better than mediocre, and it includes stocks, stick with it!

“Okay, I will.”

Good, the future you, sitting on a beach sipping drinks with paper umbrellas, will be so glad you did!

China’s currency devaluation, the stock market correction and Powerball

Recent news headlines could drive you crazy:

China’s currency devaluation and fears of slower worldwide growth lead to a stock market correction;

North Korea claims to have detonated an H-bomb, but the US says “we don’t believe you”; and

Powerball hits a record $1.5 billion prize.

However, just as the record size of the Powerball jackpot is no cause to buy lottery tickets, the January jolt to stocks is no cause to deviate from your long-term investment plan … although it is wise to brace yourself for what is likely to be a choppy market ride in the new year.

Abby Joseph Cohen, president of Goldman Sachs Group Inc.’s Global Markets Institute says, this is “the S&P 500’s worst-ever start to a year [sending] the index down 7.5 percent in 2016, near lows seen during a rout over the summer.” See “Goldman Sees 11% Upside in S&P 500 After ‘Emotional’ Selloff” in Bloomberg News, January 14, 2016.

Ms. Cohen goes on to say, “What is happening is really very much an emotional response … We need to put things into perspective. Stocks are probably the best place to be.”

I agree. Predictions of a US major recession, let alone a full market collapse, have not come to pass.

In fact, US GDP has grown for all but one quarter since the end of 2011 and unemployment is down to 5%; US Dept. of Labor consumer price index is near 0% – as a measure of inflation. CIT Voice of the Middle Market, where 59% of the middle market corporate managers think that the best way to judge economy is to observe economic stability of their community, says that its 71% of the group say their companies are strong and 57% say they doing better than last year.

Yes, China’s growth is cooling down to a still very robust 6.5%. But China probably had to devalue currency to continue that growth.

Its stock market should have seen the stimulus as favorable but so many market investors in China are individuals with a short-term horizon that they could have been more concerned with buying power of their wealth and sold off their holdings. The more important long-term issues are the impact of China’s increasing debt and the impact of China’s devaluation on emerging markets.

Meanwhile, the US dollar remains strong, keeping gold prices down, and US corporate balance sheets are healthy, many having cash to raise dividends.

We remain in the third longest bull market in US history. And everything I read, from very optimistic articles to predictions of a crash, ends with something like “stick with high quality holdings.”

Some authors say this because they seek dividends, for income. But, with the Powerball in mind, I translate this to:

Short-term plays in the stock market are purely speculative, so if you want to grow your portfolio, stay out of that betting game.

You can buy a lottery ticket if you want to be speculative.

I conclude with these reminders you can chant as you read headlines on the stock market or watch TV news:

News headlines are not about me,

I won’t panic because I have a good investment plan, and

I will maintain a long-term perspective and stick to my plan

That worked well in 2008. Sticking to a long-term plan meant you participated when the market shot back up almost 10% in January of 2009.

Let me know if you want to share your comments and concerns.

Seven Deadly Sins of investing

The single most important risk to a portfolio of investments is a poorly defined or constantly changing strategy. You must have a long-term approach to which you adhere over time regardless of the current favor of the particular strategy. You will need to resist the psychological pressures of investing:

Consider these “seven deadly sins of investing”:

  • //gluttony//– hoarding cash when you should invest or evaluating by only one category when you should look at the big picture;
  • //greed//– looking for big winnings when time and patience pay off;
  • //pride//– not selling your losers or old, familiar holdings when a new idea is better;
  • //lust//– listening to the information barrage and adjusting your portfolio constantly rather than filtering it out to stick with a plan;
  • //envy//– chasing fads or looking at a friend who has “winners”, making investing look more like gambling, when actually you should sell your best and buy trailing but good positions (as in the “dogs of the Dow” technique);
  • //anger//– not forgiving yourself for mistakes and moving on; and
  • //sloth//– changing beliefs to fit your decisions or portfolio rather than applying the lesson that you should review a portfolio intellectually and objectively and decide if you would still buy the holdings today.

You should review your asset allocation at least annually. A stock market rise will leave you over-weighted in stocks, meaning that you should sell out of stocks and buy into bonds and cash to maintain the allocation. If the stock market goes down, you should do the reverse. In fact, you should sell from your better mutual fund managers and buy the managers that have not done as well recently because those excelling and those lagging are both likely to return to the mean over time. Reallocating may seem wrong, especially when bond yields are low and CD rates are low. Nonetheless, history tells us to override the psychological urges, take “profits” from those currently doing well, and re-deploy them with assets that are more likely to provide future returns.

Adhering to a sensible investment strategy is how money is made over time. You may feel that you missed out compared to someone who is all in the right stocks now. However, you will also be glad to miss out when that person’s holdings go down faster than the market and you have non-stock investments that increase in value. Also, when there is a new influx of capital, you need to have a strategy so you can sensibly filter the barrage of information from people wanting to help you handle you finances.

The financial world today – adjusting expectations and planning rules

Has investing changed in the last few years? A recent Morningstar post began with this statement:

BlackRock’s Larry Fink says be 100% in equities. PIMCO’s Bill Gross claims equities are dead. Vanguard’s Jack Bogle preaches stay the course with a balanced portfolio. To read the headlines, it seems that three of the best and most trusted names in finance are decidedly at odds with one another. In truth, their forecasts are far more similar than dissimilar. [from Should I Stay or Should I Go? – Don Phillips, 10/11/2012]

His point is that neither extreme, 100% stocks or 100% bonds, is rational. Instead, we have to realize that returns will be less for now and yet still invest well.

**Expect less: ** Interest rates are at all-time lows, making fixed income returns meager, and equity investments may depend directly or indirectly on renewed growth and employment, which is not rebounding significantly any time soon regardless of who our next President is.
**Diversify more:** The correlation among asset classes is closer than before, making diversification more challenging. As Feifei Li said in a recent Morningstar post, it is not a question of having all your eggs in one basket but of having too many eggs. This would mean adding market-neutral, commodities, and real estate, to a portfolio of just stocks, bonds and cash. Among other ideas, writing calls could even be a good strategy to create income so that you have a positive return in an otherwise flat market.
**Cut back withdrawals:** Where we used to say, as a rough rule, a 4% rate of distribution would allow the portfolio to grow to face future inflation, while any higher withdrawal rate would eat into principal quickly. Today, the rule may be a 3% rate, or we may need to use other ways to analyze the proper rate of withdrawal, such as the Withdrawal Efficiency Rate from a recent Morningstar post [see below]
**Tax planning: ** As we indicated in a recent post, taxes will have more impact so tax planning to achieve even a 3% rate of return is essential. With the changes coming in 2013, good planning could add to your returns over time. **See** [[http://sab-esq.com/2012/10/20/2012-year-end-tax-planning-2012-vs-2013-tax-strategies-requiring-action-now|Year-end-tax-planning-2012-vs-2013-tax-strategies-requiring-action-now]]

**References:**
**Should I Stay or Should I Go?** – Don Phillips, 10/11/2012
It seems that three of the best and most trusted names in finance are decidedly at odds with one another. In truth, their forecasts are far more similar than dissimilar.Eggs Are Not Enough: The Truth About Diversification – By Feifei Li | Posted: 10-22-12
**Eggs Are Not Enough:** The Truth About Diversification – By Feifei Li | Posted: 10-22-12
Diversification means not putting all your eggs in one basket. But do you own too many eggs?
**Retirement-Withdrawal Strategies Quantified** – David Blanchett, CFA, 10/19/2012
According to a new Morningstar metric, the best approach incorporates portfolio value and life expectancy.