Would You Pay A Robot To Do Your Investing?
Yes, you read that title right. I’m not talking about investing in robotics stocks, but having robots do your investing in the stock market for you. Truth be told, it’s not actually robots doing the investing for you. In reality, highly specified algorithms manage your money and remove the emotion from investing for you.
I was reading this article on NPR recently that was talking about the growth in startups that are seeking to help make investing easier for the masses. I’m all for making investing in the stock market easier for those who don’t understand the basics as I saw great need for it in my former day job and thought this trend was something that warrants discussion to see if it’s something you should consider for your portfolio.
What Do These Robots Do?
As noted earlier, these are not robots per se, but algorithms that are meant to do the heavy lifting for you. The main company discussed was a startup in San Francisco called SigFig. They do things such as:
- Rebalance your portfolio
- Recommend what ETFs you should be invested in
- Consolidate your outside brokerage accounts
- Lower your fees – their service is completely free if your account value is less than $10,000 and only $10 per month if over that threshold
You might think this is somewhat similar to Betterment as I have done a review of their services in the past. On one hand, it is very similar in that Betterment asks you questions to gauge where you “should” be invested and their algorithms put you in a basket of ETFs that match with that. One big difference between Betterment and SigFig is that Betterment houses your investments, while SigFig doesn’t – they move all your accounts to either TD Ameritrade, Fidelity, or Schwab.
With all that said, the purpose behind these algorithms is to make investing in the stock market easier for those who lack the time or education to do so adequately. Investing in the stock market, on numerous levels can take time if you’re just starting out and have little knowledge. The argument that this investor should just open an account with Vanguard and go into index funds is a good one, but misses the point. The point is that many out there don’t even know what an index fund is, (trust me, I spoke with them every day for years) and are challenged to even know where to start on a basic level. With that in mind, I believe the offerings behind firms like SigFig are “good,” but do you want to trust an algorithm with your investment portfolio?
Should This Be Considered a Viable Option?
The main thrust behind this trend in using algorithms for investing purposes is a good one on several levels. The main one being lower cost, which many can benefit from when it comes to investing. At $10 per month you get rid of any trading costs, and the company would argue that we as retail investors get to benefit from that lower cost as it impacts the market (which honestly is a benefit). For the right investor, this could be a viable option to consider but is certainly not something that would fit everyone.
My main concern is the seeming removal of the human element from investing. The article from NPR cited the desire to lower cost and the bias you can find with some financial advisors. I completely agree that some advisors are biased and sell based off of what’ll make them the most money and not you, but not all advisors out there are like that by any means. There are a large number of advisors who are good and can help you meet your goals, you just need to do your due diligence to find them.
This is also not to mention the fact that these algorithms can easily be shut off, it just takes you to do it. So, what happens when the Dow tanks 400 points and you’re tempted to sell off? You simply choose to flick the off valve on your algorithm and sell out. Sounds simple, doesn’t it? The problem is that decision could likely do more harm than good and is one that a good advisor (assuming you’re working with one) will help talk you out of by encouraging you to continue to maintain a long term view.
When it Comes to Investing You Have to do What’s Right for You
As I look at it, this growth in using algorithm-based investing services for your investing needs has good and bad issues with it. I love that their intent is to make investing simpler for those who may not understand it. I also love that they’re aiding in lower costs and barriers to entry for the retail investor. That said, I don’t like that they’re aiming to replace, on several levels, the human element as well as advisors. In my opinion, both are needed in order to offer a full spectrum of investing options for all of us.
Essentially, that is really what it all goes back to – there is no cookie cutter approach when it comes to investing. What is going to be right for me would be a mistake for you and vice versa. While there are a number of investing basics that most of us should follow, your investment plan really needs to be tweaked from there in order to take you to the destination you’re trying to reach.
In regards to whether or not you should use an algorithm-based service to take a majority of the decision making out for you, that goes back to what your needs are as well as what your knowledge level is. Personally speaking, I don’t believe I’d ever turn everything over to something like that, though I’d not be opposed to putting a very small portion of my portfolio (say 5-10%) towards something like this to try out a strategy I’m interested in. At the end of the day though, please make sure that you’re understanding what you’re investing in as there are few things worse than investing in something you have no clue about.
What are your thoughts? Would you trust an algorithm (or robot) to handle your investing in the stock market for you? Do you ever see yourself hiring a financial advisor at some point, or do you prefer to go it alone?
Photo courtesy of: Chris Isherwood