Index funds have been among the hottest investment products for some time now, and newfangled robo-investment platforms have become a favorite way to partake. Offering convenient online access and low costs, investors can also avail themselves of sophisticated extras like tax-loss harvesting and algorithmic asset allocation. Who needs a professional advisor when your robo platform models its portfolios based on the research of Nobel-Prize winning economists? (How's that for cachet?)
So I was interested to read an article on today's SA from Kendall J. Anderson, CFA, who warns that these financially engineered products and systems can be abused, and argues a human financial advisor is suited to preventing such abuse. He writes:
Robo-advisers, or for that matter, any financially engineered product or investment approach, must have a watchdog willing to turn off the switch and start over. When it comes to your portfolio, we are the watchdog and it is our job to change if change is necessary."
The hazard advisors are supposed to prevent is a "blowup" - a non-technical term he borrows from no less than Nobel Prize laureate Dr. Robert C. Merton in an interview from the latest issue of the Financial Analysts Journal, which I myself recently cited.
Anderson, who like Merton, enjoys racing cars, analogizes robos gone wild to the damage caused by "too much fuel or air pumped into a combustion chamber." He writes:
This causes a big dent in a drag racer's pocketbook, but it is minimal compared to the damage to one's portfolio if a mechanical robo-adviser tries to add a little more return without understanding the consequences."
I'm not against index funds, ETFs or robo-advisors. They all have their place in my view, if used responsibly. Perhaps it's because I just heard a lecture on the use of smart phones and social media venues like Facebook as part of a high school back-to-school night presentation last night that the thought occurred to me: What makes DIY investors so confident they won't make every classic mistake in the behavioral finance textbook when (to re-frame this to a non-investing topic) their kids engage in all kinds of risky behavior via social media? Even those who just "passively invest" in Facebook and stay mostly out of trouble "only" waste their time, subjecting themselves to bad influences for which they'll pay the price down the road (akin to a market crash).
My kids do not use social media. Their parental advisor doesn't permit it. They use their time developing their talents and abilities in a host of areas and will one day continue to seek growth with or without such advice. Investors could similarly take a step back and consider the pitfalls that exist in the market and the ease of falling into them. They should invest -- by taking calculated risks that promote growth - but not before emplacing fences to protect against these hazards.
What do you think? Please share your thoughts in the comments section.
Meanwhile, today's links:
- Kevin Wilson explores the helicopter-money-induced reflation trade.
- Hartford Funds economist Nanette Abuhoff Jacobson looks at the investment implications of a Trump or Clinton victory (including inflation risks, as above).
- Allianz Global Investors' Kristina Hooper is also worried about inflation, completing our cluster.
- Janus Capital does not anticipate a September Fed hike, in part because of the trillions of dollars in money market funds currently in transition because of Rule 2a-7.
- Christopher Price plays with the numbers and finds $500,000 nest egg stashed over a mere 20-year working career could fund retirement for the median wage earner.