How to EASILY Outperform Robo-Advisors

It is EASY to outperform robo-advisors? Why?

They don’t even try to outperform. They try for: “Reasonable return with less risk”.

 You would think robo-advisors would just invest in a few broad indexes, but often they don’t. And they require you to invest in bonds no matter how high your risk tolerance.

Robo-advisors are big investment companies, not financial planners. They are more likely to lose a client because of a 30% 1-year market decline than 10 years of lagging the index. So, they focus on market fluctuations, not your life goals.

This makes them use “performance drags” that typically reduce their returns by at least 1-3%/year:

Bonds – They try to force you to buy bonds even though studies show that over 20-year periods, equities (stocks) are more reliable. Stocks have a lower 20-year standard deviation after inflation than bonds.

Home country bias – They invest in Canada because it sounds safer, even though returns have been 1-3%/year lower than global stocks. Canada’s index is not a diversified portfolio. It is a resource & financial sector fund.

Riding the brake – Many ways to invest conservatively. like dividend, low volatility, or covered call ETFs. They sound good, but give you lower long-term returns.

This post is about performance. How to get the maximum reliable long-term return. It is not about risk-adjusted returns. It’s about getting a high enough return to achieve your life goals in your Financial Plan.

You should invest within your risk tolerance to avoid panic selling at a low. But if you invest more conservatively, it’s important to understand how the lower long-term return will affect your Financial Plan.

Story of aggressive engineer that “gamed” the risk tolerance questionnaire at a robo-advisor. Still forced to take 20% bonds.

Story of early 2017 & robo-advisor lagging index by 10% in 6 months from low volatility & smart beta ETFs.

It is EASY to outperform robo-advisors because they are big companies with compliance rules that are more important than your life goals. They give you “compliance advice” to protect their company, which means you cannot normally even invest 100% in equities.

Just get the return of the global or US equity index and you outperform robo-advisors. You could use one broad index ETF or invest with top fund managers that outperform.

We invest for “above index returns” with an elite portfolio manager that finds the world’s best investors that all have 15 to 30-year track records beating the index after all fees.

Most fund managers lag, but just like any field, there are some amazing people that outperform. We try to beat the global equity index after all fees, including ours, so that our fee-for-service financial planning advice is purely value-added.

We are confident our portfolio manager should match or beat the index over time. 100% of my personal investments are with the same portfolio manager and same All Star Managers as our clients.

Don’t invest for: “Reasonable return with less risk”. Invest for maximum reliable long-term total returns.

Details in a full post on this topic on my blog: https://edrempel.com/how-to-easily-outperform-financial-advisors-robo-advisors-index-investors/ 

Unconventional Wisdom is the #1 blog in Canada for a financial planner. If you are interested in talking with us, go to: www.edrempel.com/talk

Ed