Robo-advisors provide financial advice or investment management online with moderate to minimal human intervention. They provide digital financial advice based on mathematical rules or algorithms.
In the last few years, these algorithms have invaded company 401(k) retirement plan offerings.
Robo-advisors were slammed in March stock market meltdown. Their algorithms and model portfolios struggled to keep up with the coronavirus-induced stock market sell-off. Here is a great robo investment advisory performance summary article.
Who knew that the most recent stock market crash could not be fixed with an algorithm?
The main problem with robo-advisors has now been exposed. That is, these new online investment advice tools are too reliant on models and forecasts.
Nobody needs an active mutual fund manager when the stock markets are going straight up for 12 years. The same can be stated for company 401(k) index mutual funds.
When the stock markets correctly violently like they did in March, that is the time you will find out if they investment advisor you hired to manage your money is protecting your company 401(k) retirement plan account principal.
Robo-advisors lack the common sense of human beings reacting to real-time information and data. I guess that is what happens when the computers are too busy trying to predict the future.
Forecasting stock market risk does not work well. The U.S. stock markets have never seen this level of volatility. Reacting to managing the stock market risk as it develops works better.
Company 401(k) retirement plan participants don’t need a high-tech crystal ball. Much more useful to managing stock market risk would be a common-sense stop loss.
Robo-advisors all use forecasting to some degree. Worse, the same algorithms use back testing to create their forecasts. They use historic information to react to current stock market events?
What? And individual investors sign up for this stuff?
I have read enough academic studies in my career to know a handful of things are true. Using back testing to create stock market trading rules is full of holes. The results often provide very misleading results and conclusions.
Stock market asset allocation and risk management strategies for individual company 401(k) retirement plan participants should focus on adapting their investment management strategies to changes in the stock market environment.
Robo advisors never imagined the last six weeks of the U.S. stock market environment. There are serious questions if they can ever build models that will learn from their mistakes.
Don’t think for one minute that your company 401(k) retirement plan account principal is safe from a stock market downturn if you signed up for a robo advisor.
Ric Lager
Lager & Company, Inc.
