Robo Advisors - Passive Management

Robo Advisers 1.0 are on the rise since 2010. They have a very simple concept: "Buy the broad market as cheap as possible" and this concept has worked well, since the end of the financial crisis in 2009.

What is a "Robo-Advisor"?

Robo-advisors or robo-advisers are computerized platforms that provide automated, algorithm-based portfolio management services with less or no human action.

A typical robo-advisor collects information from investors about their current financial situation and their future goals, usually through an online survey.

And then based on the data it offers suitable robo advice and / or automatically invest’s the client's assets.

There has been a significant rise in the usage of the Robo Advisors in UK, Germany, Switzerland and many other countries.

Benefits of low fee passive investment are repeated like a mantra:

  • Invest in the market with a "forever hold" investment scope, because the market will go up forever.
  • Look for the cheapest offer. Any company can do passive investment, and the cheapest is the best.
  • Active investment is a loser. As the market goes up forever it makes no sense to be anything but long the broad market.

No matter where you find, every broker or bank has their own Robo Advisors now. Mostly selling their own products or some investing services. And even neutral Robo Advisor 1.0 like Ways2Wealth are on the rise for their free robo advisor offerings.

Investments in passive funds is nearly 36% of all U.S. retail fund assets (Source: Morningstar), and there seems to be no end to this trend.

Robo Advisor 1.0 was not a product innovation, it was around since 1950’s. It was a distribution and price innovation, as Robo Advisors 1.0 was not using any expensive classic investment sales channels. But selling directly over the internet at a lower price.

"Blind investing" or "Passive investing" has became the norm. Is it possible that something can be added to something, that is so good and running so well?

Governments have too pushed huge amounts into the markets

With governments dealing out more and more money and an increasing number of passive investors investing blindly and confidently. It deforms the reasons for markets to survive a mechanism for providing money to the right companies.

The idea of the market is, that investors should always invest in good companies, and let them prosper and take away money from firms, with lower productivity.

With central bank easing program, one after the other and waves of money rolling over the company in the passive indexes.

There is no separation between the good and bad, or even thinking about in which one to invest.

In a kind of finance socialism, all companies get the same share, in which they are indexed in one of the big indexes like SMI, DAX, Euro Stoxx, Dow Jones or S&P.

Quantitative easing has given money to everyone, made the stock market more equal, there is no sector rotation and no surviving of the fittest anymore. This builds a cycle from central bank easing, which brings in easy money everywhere, and instead of investors analyzing and investing in the best companies, they invest in the same ratio into different sectors.

Stopping the surviving of the fittest, giving money to everybody, and have financial socialism is not a bad thing (and even I am a big fan of passive investment), but it contains risk, i.e., money is given to wrong companies; that bubbles are built, market mechanisms do not work anymore and some poor companies are overvalued in addition to the over-valuation of the market.

For example, If you invest in "NASDAQ index" then you own a part of "Snapchat's" non-voting right shares having ticker symbol "SNAP". It was listed in March 2017 in NASDAQ and is smartphone-based social network app.

Snapchat's value is 40,000 Million US $ and it has never made any profit, and will probably not make any profit in the near future. It is run by some 20-year-old CEO, who pay themselves 1 Mio. US $ salary a day, and it has fierce competition from Facebook, Twitter and Google.

A conservative investor would probably not have invested in Snapchat, as it’s a risky investment, but in the index, it is sold as good long time investment to the investors.

The same happened with Collateralized Debt Obligation (CDO) which has led to the financial crisis in 2007.

Different real estate mortgages of lower quality (called subprime debt) were bundled together and sold with the argument that "it is a diversified investment in the broad market, backed by a broad bundle of real estate".

The idea of diversification was good, but just the fact that too much subprime was in the package, made it a loser. Snapchat can be seen as a subprime debt packed in the NASDAQ and your investment portfolio.

The Robo Advisor 1.0 investor is comparable with the CDO investor of 2007. Or with O'Neill words, an investor in a "bubble machine" or a winner-take-all system that inflates already large companies, blind to whether they’re actually selling more widgets or generating bigger profits will be built (The New Yorker - Is passive investment actively hurting the economy?).

Outcome: Passive Investment ETFs and Robo Advisors 1.0 further fill the bubble and can miss allocating money.

How high are assets valued today?

Total market cap (measured by Wilshire 5000 Total Market Index or Global market cap) in relation to GDP is broadly accepted measure of under or over valuation of stock market, as both measures are somehow in a fundamental relation to each other.

In "SAMT AG" proprietary system, the "Wilshire to GDP" ratio shows a stock market, over valuation of 25%, the highest over valuation reading ever. At the bottom of real estate bubble crash in March 2009, the ratio showed an under valuation of 30%.

Note that, this indicator is not a good source to trade, as an overvaluation or undervaluation does not mean the market has to be better in the near future. The under or over valuation can go on for many years.

But this ratio can tell, if you buy at a high or a low price compared to history. Keeping cash to invest only in a market under valuation will not work as a concept, as it is impossible to say when the next under valuation will happen and it offers a poor performance, based on scientific analysis. In fact, we know that if we invest now we will get a bad price, but we have to invest anyhow because we are not able to say when market will be better again.

Outcome: Market price can be measured and it can be understood that if the price is high or low, but it does not help for trading, as it does not indicate when the price will change or the market will correct itself again.

Is it safe to invest with robo advisory firm?

Robo Advisor 2.0 is a concept, which goes beyond an ETF investment concept. It is based on the "direct to customer", or "online sales distribution innovation" from the 1.0 concept, but in addition, it offers product innovation in alternative investment concepts, which are not correlated with the stock market.

It is a core-satellite concept, where stock or ETF investment is the core, and different non-stock market related investments are the satellite investments. The core is still based on a long-term buy and hold approach, but has additional approaches on "How to handle and act inexpensive or cheap markets?", measured by market capitalization in relation with GDP.

SAMT AG has developed a standardized portfolio-based approach in which we offer an ETF core investment and different alternative modules as satellite investments.

  • The 1st enduring core module is constructed in a way, that it does not need to be changed for many years.
  • The 2nd module offers an alternative investment in spreads between commodities.
  • The 3rd module offers different investment advices, i.e., with a fundamental approach or futures swing trading. This all is controlled by a risk management module, and the money is split between the different modules.

In addition, ETFs or stocks can be sidestepped with options, all the time, or in phases of higher volatility. This allows it to be fully invested, but not only in stocks. The shift between the modules is changed, and more of the money is invested in stocks when they are at less price.

Final investment conclusion:

Bubbles and mis-investing in Stocks, Bonds and Real Estates are everywhere, but this does not mean that something is burst. A correction still can take years, but if markets correct it will take years or decades to reach the old level again. Investors are forced to invest somewhere, as idle cash is not an option, as it will deliver lower performance.

Robo Advisor 2.0 offers investment solution which diversifies it, in additional dimensions such as alternative investments like managed futures, commodity spreads and offers fundamental investment or other diversified investments for a fair price.

FAQ's:

What is Tax Loss Harvesting?

Tax Loss Harvesting is a practice of selling a stock, mutual fund, exchange-traded fund or marketable securities at a lower price, than which it was bought at. This strategy is usually followed to reduce taxes. Even though it cannot bring back the investor to the previous position, however, it can significantly lower the loss.

Which robo advisor suits me?

A robo advisor is suitable for you or not, depends on the way they are set-up and your personal circumstances, whether you have fixed income or want to invest a large capital at once etc. It is advisable to select the suitable one, after properly analyzing the minimum investment required, type of technology used to manage the portfolio, and the management fee. Some robo advisors will typically have higher fees as compared to some active managers and minimum sum in investment account, and are tailored more towards high-level investors.

Is robo advisor better than human advisor?

Robo advice is usually low cost, unemotional, transparent, risk-focused and can also offer customized approach since it's based on algorithms. However, a financial adviser can help you with financial planning, if you have a higher 6 to 7 digits of income to invest, then financial advice will be of much help. At the end of the day, a robo-advisor will provide services to the selected group of investors, and financial planner will provide services to different group of investors.

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We have successfully developed many free diversified portfolios for our customers and they are more then happy and rated our service with 5.00 from 5 stars based on 10 Reviews.

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