Have you thought about using a robo-adviser to manage your portfolio? Do you have any idea what they are?
Before trying out this intriguing new option, be sure to think of the potential downfalls.
The beginning of February brought significant volatility to an investment marketplace that has been very quiet for the past two years. The first week of February saw U.S. markets drop by roughly eight per cent and the following week saw them regain approximately two-thirds of those losses.
During that drop, something interesting happened that has not been widely discussed — the website crashes of several robo-adviser sites.
Robo-adviser is a term used to describe the online investment websites that offer limited to no human contact investing options for those who prefer to pay lower fees in exchange for basic investment management using index-tracking funds.
The robo-adviser websites of two of the country’s largest providers — Wealthfront & Betterment — crashed on Feb. 5 as the U.S. markets sank a little over four per cent in one day. Similar outages were reported by U.S. online brokerages such as Charles Schwab and Vanguard Group.
The robo-platforms were quick to respond, saying that these “glitches” were short-lived and most services were restored later that same day. But the question nobody seems to be asking is, “Why did they crash?”
The reason for these crashes was largely due to an enormous number of online investors panicking and jumping onto their accounts. Many jumped online to sell some or all of their investments.
These investors could no longer pick up the phone to hear from a more rational voice in the form of an investment professional who would be there to calm them down and talk them off of a ledge.
How did that work out for those that sold in a panic? As stated above, the market dropped eight per cent and then regained roughly two-thirds of those losses within a week. So, an investor with $1 million in their online equity portfolio on Feb 1 who panicked and sold cashed in around $920,000 if they sold at the low point since they realized that $80,000 loss.
A similar investor who works with a professional adviser may have also panicked, but then talked to their adviser about what to do. Their adviser told them to stay the course and that these market corrections are all part of a normal market cycle.
That investor is still invested today, and their portfolio has recouped most of what it lost. They also remain invested to regain those remaining losses in the coming weeks as things start to settle down.
Herein lies the true value of human advice and why people need to think twice about using a robo-advice platform.
Many investors will tell themselves that they understand market cycles and can hold on during a downturn, but the history would suggest otherwise.
There is no question that many have turned to robo-advisers due to bad experiences with human advisers and I will be the first to admit that our industry has plenty of people who should not be giving out advice.
But the alternative is equally concerning when you give up all of the benefits of a human adviser who can incorporate financial planning, unexpected events and logical decision making into your investment plan instead of using a simple algorithm or merely tracking an index.
The key as always is to find an adviser who has the appropriate training and knowledge to guide you properly and who will be there during market drops to keep you on track.
This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.