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Weekend reading: Robo-adviser tin men can’t substitute for courage and brains

Weekend reading

Good reads from around the Web.

Tons of links this week, so I’ll just kick things off with a Bloomberg piece about bear markets and robo-advisers.

Bloomberg notes:

The rise of these robots and their automated investment strategies has largely coincided with a multi-year bull run in stocks, which means the nascent industry could face a big test if markets were to turn.

A bear market would represent a challenge that the ranks of robo-advisers haven’t encountered yet, and it would be the ultimate test of just how crucial, or irrelevant, working with actual humans is to good, long-term investing.

It seems the tech-savvy Millennials who were first to adopt these passive and automated robo-strategies aren’t really paying much attention to the markets, compared to previous generations.

As Monevator regulars will know, such wilful ignorance will likely see them earning superior long-term returns.

The question is: Would a market crash that’s severe enough to cause ripples even inside their streamed flat white flooded artisanally crafted investing goldfish bowls (figuratively speaking) prompt them to dig out their robo-account passwords to meddle with their portfolios at exactly the wrong time?

We’re not in Kansas anymore

Pull back the curtain on all the grand mysteries of investing, and you’ll discover – nowadays especially – that simple can be most effective.

It’s easy to construct a passive portfolio. You can do it with a robot service or by investing in as few as two ETFs.

Rebalancing isn’t hard, either, whether you’re DIY-ing it or having a robot (or a blended offer like Vanguard’s LifeStrategy funds) take the strain.

The difficult part is learning why most people should take a passive approach in the first place.

And then to have the knowledge to stick with it during the tough times.

A robot can do our paperwork.

But we still need a bit of self-education to give ourselves the investing heart, courage, and brains to see it through.

From the blogs

Making good use of the things that we find…

Passive investing

Active investing

Other articles

Product of the week: Harlequins rugby club has launched a mini-bond that pays 5.5% over five years, reports The Guardian. I’ve now invested in a few mini-bonds, so I’ll not be too preachy – suffice to say that as an asset class they’re risky, illiquid, relatively opaque, and arguably too low-yielding given all of that. The Harlequins bond is unsecured, too, unlike a previous Wasps mini-bond that was theoretically backed by property. Oh, and Harlequins made an operating loss last year, says The Guardian. One for fans.

Mainstream media money

Some links are Google search results – in PC/desktop view these enable you to click through to read the piece without being a paid subscriber of that site.1

Passive investing

Active investing

  • Sell in May and go away – CFA Institute
  • Woodford: Regulators too obsessed with liquidity – ThisIsMoney
  • Buy UK shares ahead of the Brexit vote – Telegraph
  • You’re probably not a contrarian – The Motley Fool (US)
  • Jaded clients pull $15bn from hedge funds [Search result]FT

A word from a broker

Other stuff worth reading

  • Is the new Personal Savings Allowance lowering rates? – Telegraph
  • Over £100bn of pensions cash ‘at risk’ in lifestyle funds [Search result]FT
  • House prices tripled in 15 years on London Marathon route – Guardian
  • Why don’t Americans save more money? [US but relevant]Atlantic
  • The cost of financial isolation [Ditto: it’s a money special]Atlantic
  • Millennials who fit a year’s waste in a jam jar – The Guardian
  • The science of making friends – The Wall Street Journal
  • Busyness can be a sign of unhappiness – Quartz

Book of the week: Disrupted: My Misadventure in the Start-Up Bubble is an instant bestseller in the US. If you’ve ever worked at – or just passed through – a Silicon Valley start-up you’ll recognize the lunacy. If you haven’t, it might be safer to laugh at the inmates from a distance.

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  1. Note some articles can only be accessed through the search results if you’re using PC/desktop view (from mobile/tablet view they bring up the firewall/subscription page). To circumvent, switch your mobile browser to use the desktop view. On Chrome for Android: press the menu button followed by “Request Desktop Site”. []

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{ 22 comments… add one }
  • 1 Felice_Pazzo April 23, 2016, 2:08 pm

    Agreed that those plucking for robo-advisers are more likely, through apathy, to do nothing when times are not so rosy. Whether this apathy could continue through some of the time horizons you were discussing last week (years of poor / negative returns) remains to be seen. I guess the best we could hope for is these investors not selling up when the storm comes, even if they stop additional contributions. I’m not convinced that many people have the sort of conviction to sit through the sort of bear market you were discussing; from my own reading into behavioural economics, we are not naturally inclined to the “keep the faith” mentality that long term investing requires

  • 2 ermine April 23, 2016, 4:47 pm

    > The question is: Would a market crash that’s severe enough to cause ripples even inside their streamed flat white flooded artisanally crafted investing goldfish bowls (figuratively speaking) prompt them to dig out their robo-account passwords to meddle with their portfolios at exactly the wrong time?

    Yup. Fear trumps greed… BTDT 😉

  • 3 MyRichFuture April 23, 2016, 5:41 pm

    It seems to me that the key is to sign up for a robo service, pay into it regularly and then read NOTHING about investing. Just live in blissful ignorance until you want to retire.

  • 4 Mr Zombie April 24, 2016, 2:49 am

    “…streamed flat white flooded artisanally crafted investing goldfish bowls” Poetic 🙂

    Even with robo advisers the FOMO will be tough to resist, all it takes is one look to see where else your money could have been and just how much better it could be doing in “Super Awesome Happy Fund”. Info on how much worse it could have been in “Crappy Fund” is so much harder to come by.

    I suppose as well it only takes one look at your investments at a bad time for greed to rear it’s ugly head and use it’s abhorrent claws to take control of your actions.

    The MMM articles was one of the most positive things I have read in a while

  • 5 theFIREstarter April 24, 2016, 3:21 pm

    Cheers for the mention as always… That’s the first “non monthly update” post I’ve done this year I think which is quite sad!

    I nearly wet my pants reading MMM’s latest post – Tesla excites me greatly. There’s a lot of people that are out with the knives for Tesla and Musk and I just don’t get it… they are trying to do great things and even if they do fail they will have furthered our species towards being somewhat sustainable.

  • 6 magneto April 24, 2016, 7:21 pm

    @FIRE
    ” Tesla excites me greatly. There’s a lot of people that are out with the knives for Tesla and Musk and I just don’t get it… they are trying to do great things and even if they do fail they will have furthered our species towards being somewhat sustainable.”

    Yes the search for sustainability is most worthwhile.

    Several things however are thought provoking about this and other lines of approach :-

    1. Electric cars, community owned, would be a definite step forward in towns/cities where air pollution has reached ridiculous levels. But the electric power has to come from somewhere e.g. polluting power stations, whenever the wind is not blowing or the sun shining.

    2. The cost of the batteries even if rapidly decreasing, is staggering. Imagine buying a used Tesla and having to fork out for a new set of batteries. Can they be recycled?

    3. As an allergy sufferer and an engineer familiar at one time in my early years of training with combustion cycles, have always been baffled by the claims for the relative non-pollution of diesel engines. If I foolishly venture anywhere near diesel exhaust my lungs semi-collapse! Seems the light is finally being shone on this blind alley. At last!

    4. The way ahead (outside urban areas) seems IMHO to be the hybrid, running a small petrol engine at optimised efficiency, as and when needed. Still end up with the battery problem however.

    Unusual topic for Monevator!

  • 7 The Investor April 24, 2016, 9:17 pm

    I’m a Tesla shareholder since 2012 or so. I think they’ll do it but it’ll be a close run thing and success is pretty much in the price so low margin of safety. Solar is totally proven now, the path is set — from a Tesla perspective it’s will they gain the spoils and glory or die with arrows in their back. Solar PV is cost efficient already in much of the world and capacity escalating rapidly. In peak summer, peak sun, UK generates 25% of electricity demand from solar *already*. Unusual topic now but I used to argue against the peak oil crowd back in the day here. Ironically enough I’ve been trading in and out of energy stocks for 12 months and I expect oil price to go well over $70 a barrel within next year or so as capex cuts in sector have been massive and alternative energy advance is creep creep creep. But a 30-something’s grandchildren will be shuttled about in electric autonomous cars, I am pretty sure.

    Most people are decades out of date with this stuff. 🙂

  • 8 Mr Zombie April 24, 2016, 10:28 pm

    I did wet my pants reading it

  • 9 The Rhino April 25, 2016, 9:58 am

    A Tesla 70d has just popped up on my neighbour’s drive

    I think a test drive could be in order.

  • 10 FI Warrior April 25, 2016, 10:27 am

    History tells us that this is the usual order of things. The current gatekeepers of any economic sector will fight to the end to keep the status quo, with all the ferocity of a tobacco company defending its profits. That lot are still going strong decades after first taking flak and I’m not sure the vaping thing will stick it out enough to challenge properly either.

    But you feel that a tipping point is being reached with vehicles, because enough ordinary people now want this change for multiple reasons; so I am guessing that even if it isn’t Tesla that cracks it, the die is cast. The same goes for solar, the logic behind it is so clear that technological limitations aside, the only wonder is how the creative destruction it will bring to the established energy industry players took so long. (even taking into consideration the valiant resistance of the incumbents)

    I would be sweating bullets if I was holding significant fossil-fuel investments, like the many ordinary punters who don’t understand how their pensions work. By the time the main herd realise they’re holding irredeemable assets, liquidity will evaporate as everyone tries to panic sell at the same time.

  • 11 William III April 25, 2016, 12:01 pm

    @TI, FI Warrior, others: is it at all possible to invest in a low-cost, very diversified fund with some kind of negative screen for fossil fuels and carbon intensive business? If not, what would be the least cost way of achieving something similar?

  • 12 magneto April 25, 2016, 12:09 pm

    “. The same goes for solar, the logic behind it is so clear that technological limitations aside, the only wonder is how the creative destruction it will bring to the established energy industry players took so long.”

    Quite so!

    If all roof tiling became mandatory solar, we could produce 150% perhaps, or even more of demand?

    The problem which has to be cracked, and Tesla are half way there, is the energy storage. But suspect electric batteries are not the ultimate answer. Heavy, bulky, and limited capacity. Some new technology will surely emerge to solve or circumvent the energy storage problem.

    Ideally power needs to be created at the point of use, rather than transmitted less than efficiently over long distances through the grid.

    Domestic/Auto nuclear reactors anyone?

  • 13 magneto April 25, 2016, 12:14 pm

    “I would be sweating bullets if I was holding significant fossil-fuel investments, ” FI Warrior

    Not holding FTSE100/All Share Tracker then?

  • 14 magneto April 25, 2016, 12:24 pm

    “I would be sweating bullets if I was holding significant fossil-fuel investments, ” FI Warrior

    As an afterthought, think where the materials touched and used going about one’s daily activities originate?

    Surprisingly many materials might come from that wretched barrel of oil!

  • 15 DaveTMG April 25, 2016, 12:53 pm

    Not only that, but the fertilisers we use on our crops come from oil. I read a quote from one of the sci-fi writers once, that went along the lines of ‘future generations will curse us for burning the best source of organic compounds we have’.

    I’m not fretting about my oil stocks yet!

  • 16 FI Warrior April 25, 2016, 1:09 pm

    @William III, magneto:-

    I am just an normal guy trying to get it mostly right with investing to have a decent life and am here to learn, so I am not saying I know more than the norm. But common-sense never loses value, whatever the era, so while I can’t predict the future in which technology will succeed and dominate for example, I can hedge.

    My punt then for what it’s worth, is that yes, fossil fuels will not be over by tomorrow, but they are in terminal decline because the tectonic plates of power have shifted enough to make it happen. China for example has too much of it’s population in cities where you can’t see or breathe properly due to the severity of the pollution. When they decide to make a change for whatever reason, they have enough weight now to drag the world along with them.

    They also historically have a longer-term view of life than the smash-and grab-what-you-can-now attitude of the prevailing neoliberal form of capitalism that currently dominates what used to be called ‘the west’. That is why economic power is shifting inextricably to them and will continue to do so.

    Power utility bills and motoring-related costs for ordinary people in even rich countries have become way too high for unjustifiable reasons, so this is opening up their minds to alternatives. Momentum will then finish the transition to new cleaner technologies, for reasons of economics rather than morals or ideology, history proves that is what happens.

    So what can the common or garden investor do? Simple always works best, don’t invest directly in the technology, but in what reliably survives and is always needed whatever the prevailing technology. What’s recession-proof and people have to buy, whatever they believe in or whatever the technology that lies behind it? My guess is things like everyday, boringly reliable, non-cyclical, essential consumables, like toilet paper, light bulbs, everyday food, furniture, home insurance, legal drugs, (tobacco, booze, prescription sedatives which all just serve the same purpose of helping people cope with the insecurity of life) etc., etc.

    It’s the same as the principle behind the ABC investing of cheap tracker index funds, but the beauty of that simplicity-working-best idea is polished by being intelligence-lead. Choose essentials that will utilise whatever the best technology is at the time; this is the best insurance.

  • 17 The Investor April 25, 2016, 1:35 pm

    @William III — I don’t know I’m afraid. It sounds very active though, if you’re a passive investor. (I’m active as you probably know and I currently have well over 10% of my portfolio in fossil fuel companies and related service stocks. I am not sweating bullets! 😉 But I don’t buy and hold forever. There will be lots of ups and downs over time. Passive investors are no better advised to pay attention to the decline in fossil fuel use in my view than any other sectorial change. Also, while the UK weighting to fossil fuels is very high, global tracker funds are more diversified. And if/as the new energy economy winners emerge, the trackers will hold them and enjoy their ascent).

  • 18 The Investor April 25, 2016, 1:39 pm

    They also historically have a longer-term view of life than the smash-and grab-what-you-can-now attitude of the prevailing neoliberal form of capitalism that currently dominates what used to be called ‘the west’. That is why economic power is shifting inextricably to them and will continue to do so.

    Economic power has shifted to them because they used to be communist and thus woefully inefficient, and they adopted much of the tenets of free markets and global trade, and finally put their industrious 1 billion population to good use. In my view. 🙂

    Whether it will continue to do so from here may well depend on whether some sort of semi-statist / guided economy with more limited political freedoms is ultimately more successful than the freer economies of the West. Personally I wouldn’t hold my breath on that, especially as it already seems to be running up against its limits.

  • 19 Neverland April 25, 2016, 9:16 pm

    A cursory glance out the window reveals that Britain is not destined to derive a huge % of its power needs from the sun

  • 20 The Investor April 26, 2016, 10:01 am

    @neverland — You’d be better off looking at the science and trends.

  • 21 William III April 26, 2016, 11:27 am

    Oil & gas, I am not too worried about – oil is hard to substitute, gas will have a role to bridge the gap to low-carbon. Coal is another matter entirely. It’s under pressure already (witness e.g. Peabody), but will only get worse. By extension, I’d be wary of anything downstream betting on coal (e.g. a generator putting up a new coal-powered plant – however supercritical – in an OECD country looks pretty misguided at the moment).

    Despite the handsome yield on oil & gas equities, though, I am not keen to invest in them for purely ethical reasons. At 29 years old, I am likely to witness the impact of climate change in my lifetime. I have a strong preference for not contributing to this by reducing fossil fuel WACCs, even at the cost of juicy yield. Google the picture of John Kerry signing the Paris agreement with his granddaughter on his lap. To me, it is a powerful image that underscores that whereas this life can be enjoyable and rich, we must not let our enjoyment and riches ruin the planet – the source of life – for future generations and the vulnerable communities in the most hard-hit geographies.

    Unfortunately, all this doesn’t match my preference for passive investing all too well 🙂

  • 22 Mathmo April 26, 2016, 11:33 am

    Thanks for the links, TI.

    I too enjoyed the Tesla tale. I’m passionate about motoring and in particular the driving side of it, rather than the metal. I’ve had a go in the P85D (pre-ludicrous) and it’s the fastest pile of tacky plastic I’ve had the pleasure to accelerate in (seriously — for 100k, would a little leather hand-stitched by italian virgins be so hard to procure?). I’m trying to get my hands on a post-ludicrous to try out. I suspect that self-driving cars will be a significant improvement on the driving skills of most of the current wetware. I hope they don’t stop the rest of us from having a jolly good drive, however. It feels somewhat anachronistic to take the great big 16mpg monster out over the mountains of Scotland, but just as taking your investing philosophy to its greatest extremes, so you can learn a lot about who you are and make yourself a better person by taking your driving to the highest possible level. And like both sports — it’s clearly not for everyone!

    Particularly enjoyed TRB this week with his call for discipline, and am fascinated by the idea that Brexit/Bremain will represent blood in the water for those who refuse to be disciplined just yet. I will see if I can keep my nerve as we plunge into the unknown.

    As ever, I enjoyed TEAs approach on the freeze response, and I was treated this week to a talk from the creative director at Ogilvy which ran along similar lines — explaining how our consumerism (a thing which he professionally exploits) is driven by some deeply irrational (but evolutionarily logical) pathways in our thinking. Kahneman is the grand-daddy of this stuff. But everything about the illusion of choice and framing the question (would sir like a growth fund or an income fund?) is all just mental trickery. The first step to controlling your impulses is to be aware of them, and articles like TEAs (and TRBs) are great reminders of all the we need to control.

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