DITCH THE ROBO ADVISOR

A fairly recent offering from the investment services industry has been an automated service called robo-advisors.

A lot of 401K providers offer robo-advisor services to 401K investors for a fee.  The fees typically range between 0.2% to 0.5% of your account 401K account balance.  If you have a 401K account balance of $300,000, you will pay about $1,000 per year for your robo-advisor.

The robo-advisor gathers some information from you and makes ongoing investment recommendations for your 401K account.

With the advent of Artificial Intelligence, there seems to be an increase in these offerings.  Computers must be pretty good at investing, right?

Wrong.

Let me show you a real-life example.  One of our customers was using a robo-advisor before he started working with us.  He was paying about $800 per year for his robo-advisor.

Here is the portfolio that the robo-advisor recommended for him.

This looks a lot like most of the investment strategies we see from human advisors.  The typical strategy of a financial advisor is to put people in a variety of different investments.  This is the asset allocation strategy I have discussed before.

Let’s look at the 10-year, 20-year and 30-year performance of the investments that the robo-advisor recommended to our customer.

Over half (56%) of his money was invested in assets that generate investment returns of less than 5% per year while large cap index funds produce returns that are about twice that amount.

His $800 in annual robo-advisor fees was getting him lower investment returns.  And his portfolio lost over 20% in 2022. 

This is not an exception.  This is what people get from robo-advisors and human advisors.  Robo-advisors and human advisors do not put you in the best performing funds and they do not protect your savings from stock market collapses like the one in 2022.

This is not my opinion.  These are the facts.  This is the real data.

The typical advisor recommendation looks a lot like a target date fund and in most cases not even as good.  As I have written previously, target date funds are not your best option for your 401k, but you are better off with a target date fund than you would be with a robo-advisor. You'll get equal or better performance, and you'll save yourself over $500 per year in fees.

With an advisor, you get a bad combination of several weak investing strategies. The core of the robo-advisor approach is asset allocation which is a weak investing strategy. The robo advisor then tries to personalize the asset allocation strategy to some silly risk profile and whatever else it can pick up from the customer.

You end up with a bastardized asset allocation strategy that has not basis in any hard data or historical investment performance. Sounds great, doesn't it.

Save your money and ditch the robo-advisor.

You have better options.  First, just put your money in a target-date fund.  You’ll get annual returns of between 6.5% and 7.0% per year over your entire working life.  Another option is to  put all of your money in an S&P 500 Index fund which should generate returns of over 9% per year.  Both of these strategies (like the robo-advisor strategies), however, leave you fully exposed to large losses in stock market collapses, but you will be fine in the long term.

An even better option is to use our Market Signals system which uses only large-cap index funds like the S&P 500 and the Nasdaq, and which protects your money from big losses when the stock market crashes.  You get the best of both worlds, higher investment returns and protection against losses.  Learn more HERE.

Happy Investing,

Phil

---

Disclaimers The Beyond Buy & Hold newsletter is published and provided for informational and entertainment purposes only. We are not advising, and will not advise you personally, concerning the nature, potential, value, or suitability of any particular security, portfolio of securities, transaction, investment strategy or other matter. Beyond Buy & Hold recommends you consult a licensed or registered professional before making any investment decision.

Investing in the financial products discussed in the Newsletter involves risk. Trading in such securities can result in immediate and substantial losses of the capital invested. Past performance is not necessarily indicative of future results. Actual results will vary widely given a variety of factors such as experience, skill, risk mitigation practices, and market dynamics.