What Scares Me Most About Robo Investing

Robo advisors are on the rise. Wall Street invented a nifty new product, and retail investors are flocking toward it.

Robo ManOn the surface, the concept seems fantastic. Computer algorithms pick stocks based on trading rules set up by finance masterminds, removing emotion from the investing process. That’s a good thing, as emotion often leads to loss.

Robo advisors can rebalance asset allocations, dollar-cost average contributions and harvest tax losses automatically. They cost less than a human money manger and sometimes outperform them as well. With access available 24/7 on your mobile device, what’s not to like?

For smaller investors who can’t meet minimums required by financial advisory firms, it’s a great way to participate in the market. Particularly appealing to Millennials, who do everything online, robo advisors are opening up a whole new generation of retail investors for Wall Street.

On the flip side, you have institutional investors with proprietary trading desks. They use trading algorithms, rules-based computer programs much like robo advisors, to play out their strategies in the market and have been doing it for years. So the big money runs machines in the market. Now retail money is getting into the act—machines trading machines.

As computers crowd out humans, how will that affect the market?

Investor Grant Williams posed this very question in a recent interview with Chris Martenson. Connecting the dots between counterintuitive market moves and markets syncing worldwide, he noted: “Markets have been drifting higher for essentially the entire time that these machines have gained ascendency. We only know which way it works in one direction.”

Keep in mind, when prices are going up, there’s always a bid, which means somebody is there to buy what you’re selling. But when prices drop, severely, buyers pull back, and prices gap down. Rules carefully constructed in your robo portfolio might be bypassed, and your account may suffer with the market.

“When we start to see cold-hearted, trend-following algorithms determine that the path is down, [that’s] when you’re really going to need human beings. They’re automated trading systems, looking for a bid, finding one at 90% down and hitting it. I think we’re going to see something really quite shocking when the markets finally turn.” —Grant Williams

What goes up must come down. It always does.

The stock market has been going up since the lows of 2009. Many experts agree that it’s significantly overvalued compared to historical norms.

Why is this a problem? Beyond the fact that nothing goes up forever, the source of funds is completely unsustainable. It’s not an incredibly robust global economy driving up the market—it’s central bank expansionary monetary policy, which is fancy talk for money creation.

Central banks have been printing money in the form of stimulus for years. Mostly they’ve handed it to banks where it’s held in reserve, though large chunks do manage to find their way into the stock market. Every dollar they create devalues the one in your bank account.

Bad money drives out good, like a bad apple ruins the whole bunch, like too many trolls kill a good forum, like fake news drowns out the real thing, machines trading machines are driving humans out of the market. It all works great, until it doesn’t.

That’s what scares me the most—people trusting everything to these machines.

Machines we only know from an uptrend market. Yes, they’re cheap, convenient, easy and efficient. But with ever-growing numbers of people pouring into an already overvalued market, it’s starting to smell like sheep to slaughter, to me anyway.

This is why I recommend placing at least some of your money with a human manager. Someone who knows the market. Someone who knows you, who invests alongside you, who cares what happens to you personally. Someone who can short the market and move to cash when the tide finally turns.

While there certainly is merit to robo investing, don’t put all your eggs in one basket. Because it’s never different this time.

Curious about professional money management? View my personal account statements.

All expressions of opinion reflect the judgment of Diane Cohn (DC) an investment advisor representative at Maxim Partners, LLC (MP), at this date and are subject to change. Information has been obtained from sources considered reliable, but we do not guarantee that the foregoing report is accurate or complete. MP or its affiliates may execute transactions in the securities mentioned in this report, which may not be consistent with the report’s conclusions. Links contained within any text are being provided as a convenience and for informational purposes only; they do not constitute an endorsement or an approval by DC or MP of any products, services or opinions of any third-party. DC and MP bears no responsibility for the accuracy, legality or content of the external site or for that of subsequent links. Contact the external site for answers to questions regarding its content. This document is intended only for those to whom it may lawfully be submitted. There is no assurance that any of the trends mentioned will continue in the future. Past performance is not indicative of future results.

 

About Diane Cohn

Diane Cohn is a financial advisor with a background in real estate. After suffering significant losses in the collapse of 2008, she vowed never to be blindsided like that again. Now she helps others avoid similar fates. Want to see professional money management in action? View her personal account statements.