Why index investors may be better off using a robo-adviser by Andrew Hallam


Andrew Hallam is a Canadian high school teacher who works and lives in Singapore.  He’s a big believer in index investing but he just wrote a great article in the Globe and Mail where he suggests that some index investors should consider using a robo-adviser to help them stay on track.  The main thrust of the article is: on aggregate index investors do worse than the index index.

How can this be?  Well, investors tend to buy and sell at the wrong times, usually because they are scared or overly optimistic.  Or they may delay buying if the market is down, hoping to get a lower price but may miss the rebound that comes suddenly without warning.

Whatever the reason, using a robo-adviser that automatically takes money out of your bank account every month and then purchases the proper ratio of stock and bond index funds removes the temptation for investors to try to time the market.

In Andrew’s own words

For example, during the 10-year period ended Oct. 31, 2016, Vanguard’s S&P 500 Index Fund (VFINX) averaged a compound annual return of 6.58 per cent a year measured in U.S. dollars. But investor returns in that fund averaged just 3.74 per cent a year.

Morningstar USA tracks index-fund performances. It also tracks how investors perform in each of those funds. If investors were rational, the results would be the same. If a fund averaged a return of 7 per cent a year, its average investor should earn the same return. But fear and greed sabotage investors.”

The cost to using a robo-adviser is about half a percentage (0.5%) of total investments per year.  If you compare that to the difference above between the VFINX’s 6.58% 10 year return and individual’s 3.74% return, the 0.5% seems like quite the bargain.

They key takeaway here is if you can’t create a plan to automatically contribute to your self directed retirement savings account and stick to it, then a robo-adviser is an excellent second choice.  It is still considerably cheaper than using a typical adviser and it a heck of a lot cheaper than buying mutual funds from your local bank.

Good luck.


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