This is how I imagine automated investing...

At the end of 2016, I looked at our family’s investment performance and thought, “We need to up our game.” The two options I saw for upping our game were hiring a personal money manager or using automated investing. Which one should I pick?

Most personal money managers would charge me one percent of my total portfolio value each year. To me, that seems expensive. If I need to earn just market-average returns, why should I make the hurdle that much higher?

On the other hand, automated investing is a relatively new service and a possible precursor to our robot overlords. Automated investing uses computer automation and algorithms to build and rebalance your investment portfolio, based on your investment goals and tolerance for risk.

Designing My Test of Automated Investing

At the start of 2017, I wanted to test professional money management against automated investing. So, I decided to run a portfolio management contest. My contest was simple. I would measure the performance of three types of portfolio managers. Here were my contestants:

There’s a reason I call this a contest and not an experiment. My homegrown exercise doesn’t measure up to the rigorous portfolio experiments and simulations run by economists and mathematicians. Each portfolio had different amounts and contained a different percentage of stocks.

I was able to conduct this contest without paying any capital gains taxes because the automated portfolio and life-cycle fund are part of tax-advantaged retirement accounts, an IRA and a 401(k) respectively. Plus, I was already using the Yale portfolio strategy in my standard brokerage account. So, my only transactions were switching my IRA to the automated portfolio. Switching required letting the automated portfolio manager sell all my existing IRA positions.

My Results with Automated Investing

My overall goal is to earn an average seven percent return so that I can double my money over ten years. This level of investment performance is the heart of the R Minus 10 mindset. (Download my e-book and retirement calculator to learn more.) My benchmark for this test, as with all my portfolios, is the S&P 500 index.

As you may know, 2017 was a banner year for the stock market. Here are the investment returns for the various portfolios in my contest:

  • S&P 500 Index: 21.64 percent
  • Automated E-Trade management: 17.69 percent
  • Professional Fidelity fund management: 15.91 percent
  • My implementation of the Yale model: 12.47 percent

You always need to factor in the transaction costs in investing. Here are the annual management costs for the various management options under consideration:

  • Standard financial planner fees: One percent
  • Automated E-Trade management: 0.30 percent
  • Fidelity fund annual expense ratio: 0.01 percent
  • My DIY management: Free!

The Fidelity fund can charge very low expenses because it’s an institutional fund, part of a large corporation’s retirement plan. It has a lot of money under management. They don’t need to charge much to make a lot of money from this fund.

Conclusions from My Test of Automated Investing

Automated investing did surprisingly well, beating both the Fidelity manager and me. Professional management of the lifecycle fund gave the algorithms a run for their money. My DIY portfolio was a distant third place. Partially that comes from a more conservative mix of investments, and partially that’s my amateur investment picking.

None of the test portfolios beat the S&P 500 Index. That’s somewhat by design. All the test portfolios invest in some percentage of bonds, to smooth out the stock market’s fluctuation and diversify risk.

Automated investing was affordable. It’s 70 percent less than what many personal money managers would charge. True, it’s also 30 times more expensive than the Fidelity fund expense ratio. Some of that is an illusion of scale between massive institutional investors and my little IRA account.

My Future With Automated Investing

I was impressed enough with E-Trade’s automated portfolio management that I decided to stay with it, instead of going with a personal money manager. In fact, six months into the contest, I also switched my wife’s IRA to automated trading, as well.

I have a new respect for the Fidelity lifecycle fund management. They returned decent results with very low expenses.

I decided to keep my Yale endowment portfolio in my standard brokerage account, for a couple of reasons. One, making changes there will expose me to capital gains taxes. Two, that portfolio has a lower stock percentage and tends to do a little better in rougher financial times. For the sake of diversification, I’ll keep it around.

Testing Automated Investing
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One thought on “Testing Automated Investing

  • August 29, 2018 at 12:28 am

    My 401k through Schwab. A feature they have is Guided Choice – an automated rebalancing of the portfolio based on my risk tolerance and funds available through my 401k. I have been using this service since 2001. My portfolio over the period have averaged 7.8% per year. Pretty good considering that period includes the dot com bust and the Great Recession of 2008. I definitely recommend automated rebalancing. It’s the only free lunch in investing because it forces you to sell high and buy low when you rebalance.


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