Robo-advisors – Passive gets a new package
The investment industry thrives on new products, new ways to invest that are usually just a different marketing spin on the same stuff. The basic investment strategies are well-known. You can endeavor to be a “value” investor buying low and intending to sell high. You can choose to be a momentum or growth investor buying “high” in hopes of selling at even higher prices those companies, industries, sectors, markets that are already moving up. Our trend-following approach is a variation on this theme seeking to ride a wave once it is in motion. You can determine your preferred investing timeframe, holding investments for a single day, days/weeks, months, years, or for a lifetime. Your personality, understanding of finance/business, interest level in doing the research, and time available all factor into where you fit on this spectrum of investment strategies.
After seven-plus consecutive years of almost non-stop positive markets, it is very appealing to take the easy way out and just “buy the market” through a low-cost index fund. Many folks are doing just that as the Vanguard “revolution” of index investing is in full bloom. Jack Bogle, Founder of Vanguard, long argued that it was impossible for investors to consistently beat the market. Since you can’t beat the market over longer periods of time, you should just make life easy and buy the market focusing on making the cost of doing so as low as possible. Mr. Bogle has built an enormous company offering these index products at ever-lower costs.
Once index investing gained some traction the next wave was the offering of target-date funds, often seen in 401k plans. Target-date funds invest largely in index-type funds or ETFs with the mix shifting over time. This adds an element of “intelligence” to the passive index investing process. A young person just starting a job and making contributions to a 401k plan can choose a target-date fund that roughly matches their expected retirement date – say 40-50 years out. Given how far out in time that date is, the target-date fund will be almost entirely invested in a mix of stocks. As the person gets closer to retirement and the target date of the fund approaches, the mix shifts increasingly toward bonds and away from stocks. Other than choosing what your target date is, however, there is no other input from the investor to the fund provider.
With passive investing fully entrenched in the investment landscape, it was only a matter of time before advisors embraced the phenomenon. Enter robo-advising. Robo-advising adds the opportunity for the investor to provide some front-end risk/reward input to the process often through a basic questionnaire addressing risk tolerance and outlining investment objectives. The output is a mix of index funds that presumably fits the investor’s risk/objectives input. Again, the investment is in passive index funds, almost entirely buying and holding those funds for long periods of time. The robo-advising providers will often also tout their ability to allow investors flexibility in tax harvesting – e.g. selling investments in the portfolio that fit their desired tax situation and objective.
Robo-advising will continue to become more and more sophisticated as almost limitless computing power is cheaply brought to bear on solving the investment equation. We at TimingCube work with a more advanced version of a robo-advisor named QuantAdvisor. Quant offers three of our FPResearch-driven portfolios: an All-Equity portfolio, an Income portfolio, and a blended “balanced” equity-bond portfolio. The front-end of the process is robo-like in its online risk assessment and investment objective capture. You can then direct the process by choosing one or more of the three portfolios; or the computer (robot) can suggest a mix of the three that fits your risk/objective inputs. However, in our case, the portfolios are not buy-and-hold. Instead, they apply our unique approach to investing which uses models to determine when to be invested and when not to; all in an effort to minimize risk and allow us to sleep better at night knowing that our portfolio will not suffer the horrible losses that afflict the buy-and-hold investors. Whether a robot/computer is making the allocation or a stockbroker is recommending the index approach, a buy-and-hold investor will inevitably encounter losses of -25% or more. Losses of that size require a +33% gain just to get back to even. We simply cannot afford, nor emotionally endure, such losses.
If you are interested in a low-cost, more robo-like approach to investing but still want our focus on managing risk, we invite you to take a look at QuantAdvisor as an example of a more sophisticated and risk-managed approach to robo-advising/investing.
Sell in May
It’s well-known that May through October is a seasonally weak period for the stock market. But those months are not uniformly bad. July has a strong record of performance with the month bringing gains over 70% of the time. The month is also a historically strong one for our TimingCube Models.
Chart 1: July is a breath of fresh air in an otherwise gloomy May-October period
Investors returned from the July 4th holiday weekend to a European market stressed by an Italian bank with too many non-performing loans and cautious comments from the Bank of England regarding post-Brexit financial stress. The negative tune carried over to the U.S. markets leading to a -0.7% dip on the day with energy and financial shares particularly weak as crude oil slid -5%. The European-driven fears were overcome in Wednesday’s session when a U.S. report on the service sector showed far more strength than anticipated. The report led stocks to a +0.5% rise. Stocks held flat Thursday awaiting Friday’s monthly jobs report.
The report is viewed as more important than some given the dismal outcome of the prior month’s report. The jobs report came in strong without sparking fears of interest rate hikes. This best-of-all-world’s view sent stocks roaring higher throughout Friday’s trade with market indexes nearing all-time highs.
Warm wishes and until next week.