Get help to train your investing brain with a Robo Advisor

Over the years, I’ve learned to appreciate the beauty of simplicity.  KISS (Keep It Simple Stupid) is something I embrace at work and at home – especially when I get in my own way sometimes.

How many times have you heard these straightforward personal finance mantras?

  • Live below your means
  • Pay yourself first
  • Disaster-proof your life

That’s 80,000+ books on personal finance in three bullets.

But how often do you consistently follow these instructions?

That’s what I thought.  We’re all guilty of messing up from time to time, myself included.

Keeping things simple doesn’t mean simple is always easy.  Your behaviour, biases and emotions can easily get in the way of logic and practically.  (As in, I know those “less salt” potato chips in the cupboard are not good for me, but they were too easy to access!)

Healthy eating is very much like healthy investing. Both need to be balanced, you need some discipline, and you need to work at it over time.  (More fruits and vegetables, less chips.)

The path to financial fitness is usually easier when you have a coach or a partner for support.  Thanks to the financial technology (fintech) revolution, your online coach has arrived in the form of a Robo-Advisor like ModernAdvisor (affiliate).

I profiled ModernAdvisor here, where my partnership provides a risk-free trial with $1,000 of their money to help you train your investing brain.  For today’s post I wanted to follow-up with Navid Boostani, co-founder and CEO of this firm, to find out more how this training could help.

Navid, good to chat with you again!

Always a pleasure Mark.

Navid, investors simply aren’t wired to think and act long-term.  I’ll admit I’ve struggled from time to time trying to plan my future that could be 40 years out.  How does ModernAdvisor help people execute a long-term plan?

Mark, as you know successful investing is all about discipline. To stay disciplined you need to have a plan in place, and if you’re like most people you need a coach to help you stay on track.

Not unlike a traditional advisor, we generate a written investment plan for our clients when they open an account with ModernAdvisor. This plan incorporates our clients’ goals and investment timeframe, and covers details about how their account will be managed including their target investment mix.

The only way our clients can make significant changes to their investment mix is by confirming their circumstances or investment goals have changed. This simple mechanism encourages our clients to stick with their plan and stops them from attempting to time the market by moving in and out of stocks.

We also monitor unusual and sudden changes in our clients’ goals and intervene if we determine the change is made in an attempt to game the system. We did this with one of our young clients who tried to move out of stocks before the Brexit vote even though his investment timeframe was over 25 years. A week after the vote many markets were at record highs and he was very appreciative of the fact that we talked him out of moving out of stocks and ended up increasing his investments with us substantially.

Everyone thinks they are an above average employee, an above average driver and they probably believe they have above average intelligence.  The reality is, it’s not true.  How can a firm like ModernAdvisor help investors avoid investing overconfidence?

Very good question Mark. Overestimating one’s own abilities is very common amongst individual and professional investors. In a 2006 study James Montier asked 300 randomly selected professional fund managers whether they were above average at their job. 74% said yes. Of the remaining 26% most said they were average. Of course that is mathematically impossible because no more than 50% can be above average.

Many investment mistakes are rooted in overconfidence. For example, retail investors quite often put too much of their money in a single stock because they believe too much in their own ability to choose a winning investment.  What’s worse is that they usually refuse to sell if things don’t go as expected because they are convinced that they know something that the rest of the market is missing. I personally fell into that trap myself in 2012 with BlackBerry.

To protect our clients from overconfidence the first thing we did was to make sure we never fall into the very same trap ourselves. We have developed a completely systematic approach to investment management that entirely removes our emotions and opinions from the investment decision making process. Decisions are based on well-defined models and processes that do no leave any room for subjective interpretations – as long as the inputs into the system are the same, the outcome will be the same regardless of how I or my colleagues feel about the markets.

Another way we help clients avoid investing overconfidence is by limiting them to globally diversified portfolios of high-quality low-cost index ETFs. So even if they wanted to move a large part of their money into a single investment they would not have the option. It’s paternalistic and it works – just like removing your potato chips from your house works if you are trying to eat healthy.

I have an affinity to investing in dividend paying stocks.  I do this, in part, due to the psychological benefit dividends provide – its tangible cash and income I can use.  Dividends provide some level of control but the reality is, I’m probably guilty of some mental accounting – it’s not like I’m the one sitting on the Board of Directors.  Can indexing with a Robo-Advisor help avoid this bias?

I’ve read your post and Robb Engen’s post as well. I think you both make some very good points. To me, there’s absolutely nothing wrong with investing in a basket of high-quality, dividend paying stocks. The key word here is high-quality, Mark. The problem many investors run into is that they put an undue amount emphasis on the dividend yield and do not pay enough attention to the quality of the business or the earning power of the company.

You’d be surprised the number of times I’ve heard someone claim a certain stock or REIT is a good investment because it’s yielding 6 or 7%. The dividend yield alone doesn’t tell the whole story.

The nice thing about using a service like ModernAdvisor is that you don’t need to focus solely on dividend paying stocks. With ModernAdvisor if you have ongoing cashflow requirements you can set up a regular withdrawal amount – monthly, quarterly, or annually. If the 2.5 to 3.5% yield that you earn on most of our portfolios is not enough to cover your cashflow needs, we will sell a few units of your ETFs to cover the difference. There is no transaction cost, so this is very efficient from the client’s point of view. It also allows us to invest in larger and less expensive index ETFs and supplement the cashflow if we have to by selling units.

Rick Ferri in The Power of Passive Investing wrote “strategic asset allocation and regular re-balancing provides what is widely referred to as the only free lunch on Wall Street.”  As a hybrid-investor who owns many dividend paying stocks, it is somewhat of a challenge to ensure my portfolio remains balanced – such as, I’m not overweight in Canadian banks at any one time.  How does a Robo-Advisor help with asset allocation?

I used to run into the same problem Mark in the early days of my investing career. At the time I was doing a lot of bottom up analysis looking for solid businesses to invest in at an attractive price. The problem was depending on where we were in the business cycle I’d always end up massively overweight to a certain sector and a lot of unsystematic risk in my portfolio. I learned my lesson early on though when I experienced huge swings in my portfolio due to my inappropriate sector exposures.

At ModernAdvisor all of our client portfolios are globally diversified and consist of multiple ETFs. Most of our core portfolios include 7 high-quality ETFs covering various asset classes across different geographies including Canadian, US, International, and Emerging Market stocks as well as Canadian and Emerging Market Bonds and Canadian REITs.

We use the same optimization methods that many institutional asset managers use to determine the ideal mix of assets for each of our 40 different reference portfolios.

We also monitor client accounts on a daily basis and rebalance them when new money comes in or when the account’s asset allocation deviates from its target by more than 5%. This way we make sure our clients’ investments remain appropriate for their financial goals.

In another one of my favourite investing books, Your Money & Your Brain, Jason Zweig wrote “the most critical factor in the future performance of a mutual fund is that small, relatively static number:  its fees and expenses.  Hot performance comes and goes, but expenses never go away.”   Canadian investors seem to have hit a lightbulb-moment, they are learning high money management fees kill portfolios over time.  What does investing with ModernAdvisor cost?

I’m not sure the average Canadian has hit the light bulb moment quite yet, but awareness around investment fees and their impact on long term portfolio returns is certainly increasing.

The fact is when it comes to investing you get what you don’t pay for. At ModernAdvisor we do our best to help our clients keep more of their money by keeping our fees as low as possible. We don’t have any setup or administrative costs and only charge a simple, transparent management fee. For clients who have less than $100,000 in assets with us we charge 0.50% per year. Clients who invest between $100,000 and $500,000 with us pay 0.40% per year, and those with over $500,000 pay 0.35% per year.

The only other fee ModernAdvisor clients pay is the embedded cost of ETFs which ranges from 0.12% to 0.24% per year for our core portfolios depending on the risk level.

Any other behavioural biases where ModernAdvisor can help investors?

Another bias that many investors suffer from is confirmation bias.  They may have a preconceived notion that a particular fund or stock is a good investment. When they do their research they ignore the negatives and only hold on to the positives. With ModernAdvisor we’ve developed an objective process for fund selection and asset allocation and do all of the research for the client so they don’t have to make any choices in what investments to include in their ModernAdvisor account.

Like dieting, and avoiding my potato chips, investing is not easy.  It takes a certain level of dedication, discipline and emotional detachment.  To complicate matters, just like we have different bodies, we have different financial goals.  If you’re not up for full-on Do-It-Yourself investing a Robo-Advisor can help you dissect your financial situation, clarify your financial objectives, and help you establish a balanced diet of financial products to meet those objectives.  Professional financial coaching and support can be found be a much lower costs – check it out and learn more with ModernAdvisor.

Mark Seed is the founder, editor and owner of My Own Advisor. As my own DIY financial advisor, I've grown our portfolio to over $500,000 - but there's more work to do! Our next big goal is to own a $1 million investment portfolio for an early retirement. Subscribe and join the journey!

5 Responses to "Get help to train your investing brain with a Robo Advisor"

  1. It seems to me robo advisors could be a great option for plenty of people- anyone not willing or interesting in learning about investing themselves, someone not temperamentally suited to diy, or someone looking for a good but much cheaper option for management.

    I personally know people who could be doing much better with a service like ModernAdvisor vs their current expensive option.

    Reply
    1. Thanks RBull. This where I’m happy to support firms like ModernAdvisor. Yes, they are in business to make money, earn more clients, etc. yet firms like these can and will do wonders for the majority of investors who don’t have the time, inclination or discipline to manage their own portfolios. Not everyone is cut out for that – so firms like these can fill a great niche.

      It will be interesting to see how far ModernAdvisor or other fintech firms take ahold of the market share.

      Reply

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