Anybody tried working with a "Robo-advisor"?

[SeniorWrangler]

Hey, one of my good friends was telling me all about his financial advisor who is helping him get things in order and get ready for retirement and I was very excited to check it out, however after looking at the website I can see it's one of those financial planning firms that makes its money by directing you into funds with fees that eat up all the potential profit. I'm not going to give all the fruits of my labor to some dude In an office, but I'd still like to get some expert advice, and it seems that electronic advisors have gotten pretty effective. I already have a lot of money with Vanguard and they have a very low-fee advisory service that gets good reviews. This sounds pretty good to me, but the idea of taking advice from an algorithm makes me a little nervous. I wonder if anyone else has tried this kind of thing.

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[Mman]

Hey, one of my good friends was telling me all about his financial advisor who is helping him get things in order and get ready for retirement and I was very excited to check it out, however after looking at the website I can see it's one of those financial planning firms that makes its money by directing you into funds with fees that eat up all the potential profit. I'm not going to give all the fruits of my labor to some dude In an office, but I'd still like to get some expert advice, and it seems that electronic advisors have gotten pretty effective. I already have a lot of money with Vanguard and they have a very low-fee advisory service that gets good reviews. This sounds pretty good to me, but the idea of taking advice from an algorithm makes me a little nervous. I wonder if anyone else has tried this kind of thing.

the free (or nearly free) advice you will get from an algorithm is probably better than what you will get by paying someone for advice.

Or just read up yourself from places like White Coat Investor. Pick an intelligent asset allocation for yourself (hey how about 80/20) and then use low cost funds to get there. Or be even simpler/dumber and stick your money in a target date retirement fund. After 5 or 10 years maybe you will have learned a bit more and can better allocate it yourself, but it's close enough to ideal to keep you on the right path.

 

[Financial Advisor Justin]

Hi All,
I am new to SDN I hope you find my opinions valuable! My take on robo investors is similar to telehealth. while it makes since in some situations and to some people it may not be right for others. For example If I have a lump that needs a biopsy telehealth is likely not the best option. The same would be true in investing. If you are simply looking for a generic equity/fixed income split you are probably fine, however if your a high income earner don't qualify for standard roth investments and need enhanced tax free growth strategies you not going to get that from a robot.

Let me know if you have more questions!

 

[Bored_Conscious]

the free (or nearly free) advice you will get from an algorithm is probably better than what you will get by paying someone for advice.

Or just read up yourself from places like White Coat Investor. Pick an intelligent asset allocation for yourself (hey how about 80/20) and then use low cost funds to get there. Or be even simpler/dumber and stick your money in a target date retirement fund. After 5 or 10 years maybe you will have learned a bit more and can better allocate it yourself, but it's close enough to ideal to keep you on the right path.

What's wrong with a target date retirement fund? I'm pretty young (applying to medical school right now actually) and I just started investing some of my money into a Roth IRA. Decided to invest in a target date retirement fund just to keep things simple.

I do plan on eventually managing things on my own once I'm out of residency, but up until then, I will most likely just chunk money into that target date fund.

I see a lot of people like target date funds for its simplicity. On the other hand, I often do see a lot of people say that a target retirement fund is just way too conservative and that I could do better managing my own portfolio.

Any advice on how to best allocate funds for the future? Any books you recommend I read? (Currently read White Coat Investor's Guide for Students. Going to read White Coat Investor: A doctor's guide to personal finance and investment. <-- Stopped reading this book due to some financial literacy barriers. I think it should come more easily now that I have a much stronger grasp on things)

 

[Mman]

What's wrong with a target date retirement fund? I'm pretty young (applying to medical school right now actually) and I just started investing some of my money into a Roth IRA. Decided to invest in a target date retirement fund just to keep things simple.

I do plan on eventually managing things on my own once I'm out of residency, but up until then, I will most likely just chunk money into that target date fund.

I see a lot of people like target date funds for its simplicity. On the other hand, I often do see a lot of people say that a target retirement fund is just way too conservative and that I could do better managing my own portfolio.

Any advice on how to best allocate funds for the future? Any books you recommend I read? (Currently read White Coat Investor's Guide for Students. Going to read White Coat Investor: A doctor's guide to personal finance and investment. <-- Stopped reading this book due to some financial literacy barriers. I think it should come more easily now that I have a much stronger grasp on things)

Considering I recommended a target date fund as an option, I definitely wasn't saying anything wrong with it. The only issue is the asset allocation over time that they recommend may not quite be what is best for you. Target date funds are mindless. They are easy. They are cheap. They will probably do better for you over the long term than maybe 80-90% of other ways you could do it. But they aren't perfect.

Read WCI forum. Read bogleheads forum. Simple rule of thumb for most any young physician is that having at least 75-80% of your position in equities is probably ideal until at least age 40 (some go all the way to 100% equities at young age). Then you could consider maybe slowly backing off that allocation over the next 10+ years.

Don't put money in equities that you might need in the next 5-10 years. Long term (say 10-30 years) it is almost guaranteed to be your highest returning asset, but in shorter terms it could lose money and you definitely don't want to withdraw during a downturn.

 

[Chemist0157]

What's wrong with a target date retirement fund? I'm pretty young (applying to medical school right now actually) and I just started investing some of my money into a Roth IRA. Decided to invest in a target date retirement fund just to keep things simple.

I do plan on eventually managing things on my own once I'm out of residency, but up until then, I will most likely just chunk money into that target date fund.

I see a lot of people like target date funds for its simplicity. On the other hand, I often do see a lot of people say that a target retirement fund is just way too conservative and that I could do better managing my own portfolio.

Any advice on how to best allocate funds for the future? Any books you recommend I read? (Currently read White Coat Investor's Guide for Students. Going to read White Coat Investor: A doctor's guide to personal finance and investment. <-- Stopped reading this book due to some financial literacy barriers. I think it should come more easily now that I have a much stronger grasp on things)

Their allocation is too conservative. You can pull up their prospectus, but they ramp up the bond component earlier than they should. Unless you need the money within 10 years, money can be in equities. That time frame is based a crash taking a few years to recover. You can stay in equities from 30 to 50-55 and decide when to reallocate based on retirement date and your current wealth. I’m not going to have much in bonds until about 20 years from now, and retirement funds, at least the ones I looked at with vanguard, ramp up bonds before then.

Putting money into an S&P 500 or whole stock market or whole world market ETF/index fund is very easy as well.

 

[Mman]

Their allocation is too conservative.

The real problem isn't that it is too conservative, it is that it is too one size fits all. There are some people that would do better with an even more conservative allocation and plenty of others that would do better with it being more aggressive.

But for most people most of the time it works out just fine and dandy.


(as to the inevitable question of who it would be too aggressive for I am reminded of Jack Bogle's quote about when you have won the game, stop playing)

 

[Chemist0157]

The real problem isn't that it is too conservative, it is that it is too one size fits all. There are some people that would do better with an even more conservative allocation and plenty of others that would do better with it being more aggressive.

But for most people most of the time it works out just fine and dandy.


(as to the inevitable question of who it would be too aggressive for I am reminded of Jack Bogle's quote about when you have won the game, stop playing)

I think the allocation to bonds at an early age is not appropriate. For just a little more effort like putting money in an index fund of the stock market, you make more with little risk given a longer time frame. This is a little more min/max, but it avoids leaving money on the table. The earlier years are the most important to be aggressive. You can play around with calculators and see the impact of having a little more of an edge. And it’s really easy to DCA into something like VTI or VTSAX.

 

[Mman]

I think the allocation to bonds at an early age is not appropriate.

The Vanguard 2050 retirement fund currently has a 90% stock allocation. If you were retiring at age 65, that would that would be the fund a 36 year old would be in right now. Even the 2045 fund for a current 41 year old is 88% stock allocation.

It is quite difficult to argue that is giving up much of anything in terms of expected return compared to even a 100% stock allocation. In fact, using historical US returns you gain very little going to anything beyond 80% stock allocation. Once you get to that point, they all kinda look the same.

 

[Bored_Conscious]

The real problem isn't that it is too conservative, it is that it is too one size fits all. There are some people that would do better with an even more conservative allocation and plenty of others that would do better with it being more aggressive.

But for most people most of the time it works out just fine and dandy.


(as to the inevitable question of who it would be too aggressive for I am reminded of Jack Bogle's quote about when you have won the game, stop playing)

If target retirement funds tend to be too one size fits all, how do I go about figuring out what is right for me then?

 

[Mman]

If target retirement funds tend to be too one size fits all, how do I go about figuring out what is right for me then?

read about risks and returns of various asset classes and allocations historically. Look at your life and career and try to plan out how much risk you can tolerate and how much money you will save and when you want to retire, etc.

Dumping your money in a target date retirement fund until you can figure out if you want to try to be a little more personalized with it is probably just fine.

 

[Chemist0157]

The Vanguard 2050 retirement fund currently has a 90% stock allocation. If you were retiring at age 65, that would that would be the fund a 36 year old would be in right now. Even the 2045 fund for a current 41 year old is 88% stock allocation.

It is quite difficult to argue that is giving up much of anything in terms of expected return compared to even a 100% stock allocation. In fact, using historical US returns you gain very little going to anything beyond 80% stock allocation. Once you get to that point, they all kinda look the same.

It's just not for me then. I was in a target fund but got out and reallocated to a mix of total US stock market, international market, and more exposure to small cap. I also got out of bonds in my 401k after really looking into this stuff over the last few months. The 2040 is at about 20% bonds and 30% international which do not coincide with my targets. Being in bonds right now is just crap right now with the Fed, etc. US has been outperforming the rest of the world for a while now. It will not always be this way of course, but I'm taking a more active role in my investments and am very comfortable with reallocating if the environment changes.

The easy thing to do would be just invest in VT or VTI ETFs until about 10 years until retirement and then start allocating more into bonds. It's not hard which is why I brought it up. VBTLX is up 12% over the past 20 years. VIT is up nearly 300%. Just something to think about.

 

[Mman]

VBTLX is up 12% over the past 20 years. VIT is up nearly 300%. Just something to think about.

TLT is up approximately 6.6% annualized since inception in 2002, VTI is up about 11% annualized over the same time frame.

Nobody argues bonds are going to outperform stocks over the long haul. But they do provide less volatility to a portfolio which can be of value if it helps prevent you from changing allocations at the wrong time.

 

[Chemist0157]

If target retirement funds tend to be too one size fits all, how do I go about figuring out what is right for me then?

Target funds are easy to implement and easy to understand. You do not need any knowledge of stocks, bonds, etc. Just put the money in and have retirement later.

Fees are higher, 0.15% vs 0.03% compared to VTI. These funds are just made of index funds so it's a little crazy they are charging quite a bit higher expense ratio to "manage" the index fund allocation.

Your risk tolerance is a consideration, and only you can answer that. Bonds are added to reduce volatility which is good if you are already retired and what to PROTECT your wealth, but they are not a great vehicle to GROW. Bonds have generally been on a downtown for...30 years? Sometimes they don't even beat inflation.

Also consider that as you grow older, they are selling your more productive stocks to reallocate to bonds to keep the fixed percentages. That means stocks will sometimes be sold when they are down. Index fund advice is generally never sell, just keep dollar cost averaging to take advantage of stocks being down for better returns later.

 

[Chemist0157]

TLT is up approximately 6.6% annualized since inception in 2002, VTI is up about 11% annualized over the same time frame.

Nobody argues bonds are going to outperform stocks over the long haul. But they do provide less volatility to a portfolio which can be of value if it helps prevent you from changing allocations at the wrong time.

I'm going by my experience with Vanguard. VBTLX is what they use for their bond component. TLT would have to be used in a target fund for that to be relevant to this discussion. Vanguard does not use it, and I don't see it with Schwab or Fidelity. Correct me if I am wrong or if it is used by another company.

I think bonds are fine, but the timing is important. Starting early and being invested optimally early are so critical.

See above that target funds are at risk of allocating at a wrong time.

 

[Mman]

I'm going by my experience with Vanguard. VBTLX is what they use for their bond component. TLT would have to be used in a target fund for that to be relevant to this discussion. Vanguard does not use it, and I don't see it with Schwab or Fidelity. Correct me if I am wrong or if it is used by another company.

I think bonds are fine, but the timing is important. Starting early and being invested optimally early are so critical.

See above that target funds are at risk of allocating at a wrong time.

Vanguard uses VTBIX and VTIBX for the target date funds I looked at, I didn't see VBTLX listed anywhere.

 

[Mman]

Bonds have generally been on a downtown for...30 years?

bonds have been on a 30 ish year run of spectacular returns. The worry is that they won't be able to keep it up. It is interest rates that have been on a prolonged downturn, which is why bonds have done so well over that time frame.

 

[Chemist0157]

Vanguard uses VTBIX and VTIBX for the target date funds I looked at, I didn't see VBTLX listed anywhere.

That is my mistake then. I think something autofilled when I was googling. VTBIX is up 13% since 2009; VIT is up 430%. VTIBX is up 16% since 2013; VTI is up 170%.

 

[Mman]

That is my mistake then. I think something autofilled when I was googling. VTBIX is up 13% since 2009; VIT is up 430%. VTIBX is up 16% since 2013; VTI is up 170%.

I think most people are aware of the large run up stocks have had in the long bull market we have been living in.

The question is always what to expect going forward. It becomes a lot less clear. Diversification has been called the only "free lunch" in investing.

 

[abolt18]

The real problem isn't that it is too conservative, it is that it is too one size fits all. There are some people that would do better with an even more conservative allocation and plenty of others that would do better with it being more aggressive.

But for most people most of the time it works out just fine and dandy.


(as to the inevitable question of who it would be too aggressive for I am reminded of Jack Bogle's quote about when you have won the game, stop playing)

I thought it was Bill Bernstein that said that?

 

[Mman]

I thought it was Bill Bernstein that said that?

maybe? i have no idea. Probably read it on bogleheads forum at some point.

 

[deleted1100659]

I tried something like that. But it was probably the worst experience of my life. The advice I got from there was totally ineffective and useless.

? Robo investor typically just invests the money you put in, in things like mutual funds/index funds that correlate with the S&P 500. Doesnt give you advice, just automatically puts the money in pre picked funds that have a history of good annual returns. Works fine for the most part, its easy and relatively safe way of long term investing.

 

[Mman]

? Robo investor typically just invests the money you put in, in things like mutual funds/index funds that correlate with the S&P 500. Doesnt give you advice, just automatically puts the money in pre picked funds that have a history of good annual returns. Works fine for the most part, its easy and relatively safe way of long term investing.

no, robo advisors suggest an asset allocation and then suggest putting it into low cost things like ETFs to achieve that allocation, or at least that is what they should be doing. They aren't trying to get returns that correlate to the S&P 500, they are trying to get allocations that match your risk tolerance and investment timeline. If you are close to retirement, a roboadvisor should be suggesting a relatively conservative allocation. If you are 25 years old and decades away from retirement, perhaps 100% equities is the way to go.

 

[Trefoil]

no, robo advisors suggest an asset allocation and then suggest putting it into low cost things like ETFs to achieve that allocation, or at least that is what they should be doing. They aren't trying to get returns that correlate to the S&P 500, they are trying to get allocations that match your risk tolerance and investment timeline. If you are close to retirement, a roboadvisor should be suggesting a relatively conservative allocation. If you are 25 years old and decades away from retirement, perhaps 100% equities is the way to go.

Exactly, my retirement is chiefly through a lifecycle fund, but my general investing is through a roboinvestor. The reason for this is that the fees are low. Some argue that you are better off just directly buying something like a Vanguard Total Market ETF since you will skip the advisory fees, but the nice thing about the roboinvestor is that they automatically build diversity into your portfolio. Sure the Total Market ETF will get you exposure to the US stock market, but it doesn’t expose you to bonds or international stocks. Additionally, some utilize tax loss harvesting, so even though you may have bad years, it will lower your tax bill for the year, which is something that I wouldn’t be doing on my own.

In short, I would argue that unless you have a lot of time to manage your finances, a roboadvisor is actually a pretty solid way to build diversity into your investing portfolio and take advantage of things like tax loss harvesting. A human financial advisor can do similar things, but will have a higher fee, so they might be better for people who have a lot of wealth built already and need specific advice that a roboadvisor can’t handle.