Algorithmic Retirement: Asset Allocation Daily

by: SA For FAs

Ian Bezek makes a distinction between floundering national banks and community banks, whose performance tracks a growing economy.

CFA Institute: How do you stack up as an investor when pitted against an algorithm?

Thought for The Day: The city of Stockton, Calif., is piloting a universal basic income-type program. Is this the future for a robot-idled workforce?

National vs. Community Banks

“That's an 11% difference for two banking ETFs [national vs. community banks]. That's a shocking amount of divergence for two ETFs within the same sector since March. As you can see, they were tracking almost identically until then, but since March, the correlation has fallen way off.” (Ian Bezek)

Europe and Japan

“Strong U.S. growth is leading the global expansion and powering corporate earnings, but uncertainty around the outlook is rising and financial conditions are tightening. We favor equities over fixed income, but prefer to reduce some portfolio risk. We focus on our highest-conviction equity markets - and have downgraded Europe and Japan.” (BlackRock)

Human vs. Algorithmic Investor

“One purpose of this essay is to invite you into friendly competition with an algorithm designed by Ashby Monk and his colleagues at Stanford University. Their process can select managers with limited information and little time. You may be able to predict a team’s success more effectively. Whether or not you feel like you beat the machine today, it’s worthwhile to have a plan for what happens next so that your organization can fully capitalize on its native strengths.” (CFA Institute)

Thought for the Day

In the age of industrialization, machines relieved workers of some of the arduous physical labor they used to perform – and relieved them of their jobs. Now with the advancement of algorithms and artificial intelligence, bots of various kinds are climbing the career ladder and taking on jobs performed by higher-paid executives in every field. The article by the CFA Institute just above links to research intended to compare the investing acumen of professional investors vs. a Stanford professor’s algorithm. That’s got to be a little bit unnerving for professionals who currently enjoy relatively high incomes – and not just because we’ve all seen robots best humans but because of the tyranny of data today, which reveals and ranks your performance in real time to those paying your salary.

That employers are integrating robots ever deeper into the economy is threatening to further increase the rapidly widening income gap between ordinary workers and owners of successful algorithms. Indeed, the formerly bankrupt city of Stockton, Calif., will be introducing a “universal basic income” scheme, a growing movement that would tax the wealthiest individuals and corporations to provide the unemployed, underemployed or underpaid masses a stipend covering their basic needs. The Stockton program isn’t really universal, as it will pay just 100 city residents as a sort of pilot program. And it is very basic, as the stipend totals just $500 a month; it’s hard to see how far that will get the average person, even in a low-cost area such as Stockton. And this program isn’t funded through tax resources, but by Facebook co-founder Chris Hughes’s private foundation. There’s a certain logic to a data baron’s funding of such a program, but we must ask whether a universal basic income (UBI) is a good idea.

On the face of it, it would seem that something must be done about the trend toward ever reduced employment. One attention-getting study done five years ago suggests that close to half of U.S. jobs are at risk to robotization. But is it feasible? $500 a month will get you farther in Stockton than in Stockholm. Clearly, welfare-for-(almost)-all would be more expensive than existing programs. But what I get stuck on is the desirability of such a program. I don’t want to see those who can’t compete with a robot – be they manual laborers or former portfolio managers – not have their basic needs covered, but a scheme that pays people to be idle would seem to have undesirable side effects.

“Every man is a consumer, and ought to be a producer,” Ralph Waldo Emerson said. That not only implies that people have natural talents to contribute but that stifling the expression of this talent would lead to anti-social and self-destructive behaviors. Perhaps at some future time, people will nobly give of their talents and the commonwealth would see to their welfare, but for now we remain in a world where striving for sustenance continues. I don’t have the answers, but I suspect that creative people, and not robots, will bring them to fruition. I also continue to harbor the retrograde idea that more rather than fewer people will require more teachers, barbers, physical therapists, soccer coaches and guitar teachers. And even if a computer algorithm is better at choosing assets managers than humans, I still tend to think that a human financial advisor is more capable of hearing and understanding a client’s needs and working with them toward the achievement of their personal financial goals.


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