MP Week In Review
Craig I Adams - Feb 14, 2019
Accumulating wealth is never simple, it typically takes a combination of education, experience, timing, intestinal fortitude and at times a little luck. I am becoming increasingly frustrated with the media barrage against our industry over the last few years. The attacks and attempts to oversimplify this industry are paramount to nothing but predatory advertising in my opinion. While fees do ultimately play a role in client return, and buying a low-cost ETF will indeed ensure you pay less over the course of your lifetime of investing, it is the gross misnomer of retiring “up to 30% wealthier” that should be seen as nothing but creative advertising. In fact, it distinctly reminds me of my university days and basic economic modelling “if all else remains constant… a decrease in X will result in an increase in Y”… When in the real world does everything else remain constant? The emergence of these “plug and chug” algorithmic trading platforms conveniently leaves out the impact of the most important aspects of investing: Human Behaviour, Time Horizon and Market Timing. In short these are trading platforms run by robots, for robots.
There is no doubt that the algorithmic calculations will preach the exuberance of a balanced asset allocation. The implementation of their simplified buy and hold strategies will absolutely ensure that you indeed pay less fees over the course of your lifetime; this does not mean, however, that you will retire wealthier. What they do not account for, and worse yet, fail to communicate is that on the other end of all of these computer-based trading modules is the utmost critical factor the perfectly irrational investor who happens to be overcome with the powerful human emotions of greed and fear. Anyone who has been involved in investing, either as an individual investor or an investment professional has experienced the power of these emotions. How many of these human beings do you think will maintain their investment discipline in a 2008 like scenario? The reality is very few. The vast majority will abandon their investment process with a simple click of a mouse, largely due to the overpowering human emotion of fear. The fear of losing everything they have worked for over the course of their lifetime, the fear of having their retirement plans significantly altered. Where is the algorithm at that point in time? The truth is, the platform will wash their hands of your ultimate financial outcome, simply because you (the human investor) deviated from the long-term strategy.
The factor of Time Horizon is also a critical element misrepresented in these models. Of course, when an investor signs up they will no doubt ask you a few questions on your time horizon such as “your expected retirement date”. Once again, based on your answers to a couple of simple questions the algorithm spits out your optimal asset allocation and away you go. Things may work extremely well for a while, but what if your plan was to retire in 2008? Better yet, what if your plan IS to retire at exactly the next time a similar scenario occurs (is that 2019, 2020 or 2025?). Whatever equity exposure the algorithm decides you should own will be at risk. Worse yet, what happens if the markets correct in a rising interest rate environment? Now not only your equities will decline, but so too will your bonds – so much for diversification. But don’t worry, the algorithm has your back…. feel free to call the 1-800 number and speak to someone whom you have never met, and who has taken all of 2 minutes to learn about you and your situation. Rest assured, even though you don’t know the individual and they don’t know you, the algorithm is sure to prevail.
Finally, let’s talk about market timing. Let’s suppose I transfer all of my wealth today into one of these algorithmic trading modules. Do you think the model realizes that this equity bull run is long in the tooth? Does it realize that we are, in all likelihood, closer to a major correction than a continued long-term uptrend? The algorithm will input the information I provide into the system and VOILA out comes an asset allocation model that is a feat of financial prestidigitation. The model for the most part is not tactical, while it may have certain mechanical buy and sell signals built into it, it does not account for the market cycle when you the investor decide to make your initial deposit. What would happen to my long-term investment return if at the age of 40 I decided to put $500,000 into one of these models in July of 2018, or worse yet, in June of 2008? The simple reality is that based on the algorithmic formula I would have taken a significant hit to my wealth. But, if I am not retiring for another 25 years, I suppose I should not be worried as ultimately the long-term buy and hold strategy and the low fee structure will prevail. At least that’s what they tell us. No tactical, protective investing PIVOT here ladies and gentlemen.
I do believe these platforms may have some value for initial investors with limited funds, I ultimately think those with wealth will regret their decisions. I for one am curious as to what will happen to the fund outflows of these trading platforms once the next major correction hits. How much wealth will ultimately be lost in the pursuit of lower fees? I can tell you one thing, the wait times at their 1-800 numbers will be lengthy and the phone operators will have their script well memorized. We shall wait and see. Thankfully our clients are not easily swayed by this trend, we remain loyal to them in their pursuit to ultimately grow and maintain their wealth.
On another note, just a friendly reminder to all our readers that RRSP season is approaching, the deadline for 2018 contributions is March 1st, 2019. Should you need to make a deposit and we have not yet contacted you, please feel free to give us a call.
Have a great long-weekend and enjoy the Family Day.
Craig I Adams
Investment and Insurance Advisor | Independent Wealth Management