It’s Saturday and I’m glad the weekend’s here. Looking forward to the public holiday next Wed as well. I have lunch and dinner birthday celebrations planned for my mother and mother-in-law. Such a coincidence their birthdays are only one week apart. It will be nice catching up with our families since my wife had a bad week at work.
I have been monitoring the funds transfers into my wife’s StashAway and Smartly Singapore robo-advisor accounts. The standing instructions are working well and the funds are invested a few days after being deposited in the accounts. Just a note on this delay in case you are wondering why the funds are not being invested immediately. It takes time to purchase the US-listed ETFs before being reflected on my wife’s accounts. Besides, she has 2 standing instructions every week to transfer cash into the accounts every week. Which means we are capturing price events on a weekly basis and there’s a continuous inflow of cash to be invested.
We are willing to give StashAway and Smartly a chance to prove that robo-advisors are a viable alternative. Of course, the real test would be in a downturn when the market dips or crashes depending on the severity. Not surprisingly, the fees charged by StashAway and Smartly have come under scrutiny. The common criticism being it’s cheaper to construct your own portfolio of ETFs that you have the flexibility to select and rebalance at your own time i.e. the higher costs of the robo-advisors will reduce your portfolio returns over time. This is assuming your ETF positions are large enough to make paying the minimum brokerage/commission fees worth it when making the initial investments and rebalancing.
I agree with this assessment that the robo-advisors are not the most cost-effective and flexible compared to manual construction of the ETF portfolio. However, that’s provided you have sufficient cash funds to take those large ETF positions initially and rebalance when necessary. Those minimum brokerage/commission fees can be problematic. You are likely to need a high enough paying job or a sustainable self-employment/business to have sufficient income at such levels. You will also need to be disciplined when making those transactions at the pre-determined time and not change your strategy mid-way no matter what the economic, job or market environment is like. It’s not easy to be consistently doing this over a long period of time.
I reckon only a minority of investors can be this consistent with such an ETF investing strategy. Let’s use my wife and I as an example. Although we started investing seriously in Singapore in 2015, we originally started with the intention of investing in ETFs and rebalancing periodically. It sounded good, seemed effective and had minimal work. After all, we had sufficient cash savings and salary income to make it work. I’m going to summarise a series of events from 2015 to 2017 that derailed this plan.
- 2015 was a bull market environment. I started exploring dividend stock investing because I wanted to increase our dividend income. Bear in mind that ETFs generally have lower dividend yields than dividend stocks. I did my research, analysed a number of stocks and proceeded to set up a separate stock portfolio. We didn’t do any rebalancing of the ETF portfolio because we were using our cash to invest into stocks.
- 2016 was a bear market environment. I started averaging downwards on the dividend stocks and ETFs. But I wasn’t rebalancing sufficiently because I was afraid to invest any more cash after watching the markets fall. And I was worried about what an economic recession will do to our jobs and salary income. Hence, I didn’t increase the size of my ETF positions sufficiently despite having enough cash. When the market started rebounding, I didn’t want to average upwards and held back on investing because I was annoyed at missing the boat.
- 2017 was a bull market environment. Having not taken advantage of the 2016 bear market, I started monthly investment plans to Dollar Cost Average (DCA) into ETFs to invest our cash i.e. try to rebalance. But I also sold my dividend stocks and ETFs too early to realise some of the gains, which made little sense when you think about it now. I essentially negated my rebalancing efforts.
You see why rebalancing can be tough even though it’s supposedly something easy to execute at regular predetermined time intervals. Human psychology plays a big part in limiting the effectiveness of rebalancing when you have to do it yourself. Your fears and doubts can play in your mind causing you to second-guess yourself and hesitate when taking the necessary investment actions. This cycle is difficult to break and you need to have enough self-discipline to do so.
The question becomes whether paying the additional fees to the robo-advisor to do it for you without the emotional hindrances is worth it. We are not sure ourselves and this is why we have set up competing investment portfolios. StashAway vs Smartly. Robo-Advisors vs Manual Vanguard ETFs. ETFs vs Stocks. All designed to push them to outperform each other.
We hope to get better at rebalancing so that our manual Vanguard ETF portfolio outperforms the robo-advisors. But even if we fail, we will be happy with our robo-advisor accounts performance. In a way, we have hedged out this manual intervention risk by automating a portion of our investment portfolio. The key is to balance their growth rates so we rely on both the manual and automatic components to generate the returns. It’s an internal competition that we have set up for ourselves with 10 years as the timeline. I wonder who will prevail.
Sinkie says
Ideally once you’ve done your homework and decided on a mechanical investment methodology, it’s best to automate it as much as possible. And then stop following the markets & financial news. Or even to track your portfolios, except for the 1-hour every 6 or 12 months when rebalancing.
It’s counter-intuitive to human 1-million years of evolution, to put on blinders regarding something related to survival. But it works in financial markets.
Otherwise, as you said, it’ll require inhuman-like discipline & dispassion, once we start tracking our portfolios and following market trends & events.
Finance Smiths says
Haha, not following market & financial news can be tough in the current environment when you are constantly being blanketed by such updates on print, digital and social media. But it does seem like a good approach to ignore the noise and just focus on the major developments. It would require a high level of discipline that should be consistently applied over a long period of time as you said.