A fairly recent offering from the investment services industry has been an automated service called robo-advisors.
A lot of 401K providers offer robo-advisor services to 401K investors for a fee. The fees typically range between 0.2% to 0.5% of your account 401K account balance. If you have a 401K account balance of $300,000, you will pay about $1,000 per year for your robo-advisor.
The robo-advisor gathers some information from you and makes ongoing investment recommendations for your 401K account.
With the advent of Artificial Intelligence, there seems to be an increase in these offerings. Computers must be pretty good at investing, right?
Wrong.
Let me show you a real-life example. One of our customers was using a robo-advisor before he started working with us. He was paying about $800 per year for his robo-advisor.
Here is the portfolio that the robo-advisor recommended for him.
This looks a lot like most of the investment strategies we see from human advisors. The typical strategy of a financial advisor is to put people in a variety of different investments. This is the asset allocation strategy I have discussed before.
Let’s look at the 10-year, 20-year and 30-year performance of the investments that the robo-advisor recommended to our customer.
Over half (56%) of his money was invested in assets that generate investment returns of less than 5% per year while large cap index funds produce returns that are about twice that amount.
His $800 in annual robo-advisor fees was getting him lower investment returns. And his portfolio lost over 20% in 2022.
This is not an exception. This is what people get from robo-advisors and human advisors. Robo-advisors and human advisors do not put you in the best performing funds and they do not protect your savings from stock market collapses like the one in 2022.
This is not my opinion. These are the facts. This is the real data.
The typical advisor recommendation looks a lot like a target date fund and in most cases not even as good. As I have written previously, target date funds are not your best option for your 401k, but you are better off with a target date fund than you would be with a robo-advisor. You'll get equal or better performance, and you'll save yourself over $500 per year in fees.
With an advisor, you get a bad combination of several weak investing strategies. The core of the robo-advisor approach is asset allocation which is a weak investing strategy. The robo advisor then tries to personalize the asset allocation strategy to some silly risk profile and whatever else it can pick up from the customer.
You end up with a bastardized asset allocation strategy that has not basis in any hard data or historical investment performance. Sounds great, doesn't it.
Save your money and ditch the robo-advisor.
You have better options. First, just put your money in a target-date fund. You’ll get annual returns of between 6.5% and 7.0% per year over your entire working life. Another option is to put all of your money in an S&P 500 Index fund which should generate returns of over 9% per year. Both of these strategies (like the robo-advisor strategies), however, leave you fully exposed to large losses in stock market collapses, but you will be fine in the long term.
An even better option is to use our Market Signals system which uses only large-cap index funds like the S&P 500 and the Nasdaq, and which protects your money from big losses when the stock market crashes. You get the best of both worlds, higher investment returns and protection against losses. Learn more HERE.
Happy Investing,
Phil
Disclaimers The Beyond Buy & Hold newsletter is published and provided for informational and entertainment purposes only. We are not advising, and will not advise you personally, concerning the nature, potential, value, or suitability of any particular security, portfolio of securities, transaction, investment strategy or other matter. Beyond Buy & Hold recommends you consult a licensed or registered professional before making any investment decision.
Investing in the financial products discussed in the Newsletter involves risk. Trading in such securities can result in immediate and substantial losses of the capital invested. Past performance is not necessarily indicative of future results. Actual results will vary widely given a variety of factors such as experience, skill, risk mitigation practices, and market dynamics.
For those of you who struggle with deciding upon which funds to choose for your 401K, I will be reviewing all of the different categories of funds available to 401K investors. Today, I will be focusing on one of the common 401k investing options - international stock funds.
Many investment professionals encourage investors to own international stock funds in an effort to diversify their portfolios. The idea behind this concept is that certain international stock markets may have better growth potential than the US market. As I will show below, international stock funds are not a good choice for your 401k.
There are a variety of different international stock funds. Some focus only on developed countries. Some focus on emerging markets. Some focus on particular geographic regions like Europe or Asia. Most 401K plans only offer one or two international funds.
When we compare the performance of the US economy and stock market to the rest of the world, we continue to see that US companies are the best in the world by far. To this day, no other country or region performs as well as the US stock indices like the S&P 500 or the Nasdaq.
For decades, forecasters have been predicting the decline of the American economy and the emergence of some other country or region. It has yet to materialize.
When we look at the actual investment results of international stock funds vs. something like the S&P 500 in the table below, the conclusion should be very clear. The results are not even close. Most of the international index funds have not been around for 20 years or more so we can only look at 5-year or 10-year performance but the longer term results are the same.
When your financial advisor tells you that you need international exposure, show them this chart and ask them what they could possibly be thinking? They will say that this data is based on past performance and not future performance. You should then ask them if they are predicting that the international markets will outperform the US indices in the future and on what basis are they making that prediction.
Other reasons to avoid international stocks are currency risks and geo-political risks. Gains you make in international markets can be wiped out by currency fluctuations. Political instability in other parts of the world could lead to losses in your international holdings.
Avoid international stock funds and stick to US stock funds.
Happy Investing,
Phil
Disclaimers The Beyond Buy & Hold newsletter is published and provided for informational and entertainment purposes only. We are not advising, and will not advise you personally, concerning the nature, potential, value, or suitability of any particular security, portfolio of securities, transaction, investment strategy or other matter. Beyond Buy & Hold recommends you consult a licensed or registered professional before making any investment decision.
Investing in the financial products discussed in the Newsletter involves risk. Trading in such securities can result in immediate and substantial losses of the capital invested. Past performance is not necessarily indicative of future results. Actual results will vary widely given a variety of factors such as experience, skill, risk mitigation practices, and market dynamics.
You can simplify your investing life if you know what to pay attention to and what to ignore.
The financial media works really hard to get your attention and they do it with sensational stories. We are all suckers for doom and gloom stories about the economy or the stock market. Stories of the mega-rich and the star investors always sell. Stories about promising new technologies capture a lot of attention. But 99% of what the media and the advertisers push out to you is a complete waste of your time.
In today’s article, I want to help you save time and money by getting you to only focus on the things that matter.
Let’s start with the information and the stories you should ignore:
Stock tips from anyone – people you know, media personalities, Wall Street analysts, and online posts. I’ve said it before and I’ll say it again. You should not be investing in individual stocks. You should only be investing in large cap US index funds for your 401K. Out of the 8 billion people on the planet, less than 10 people can beat the performance of the best index funds by picking stocks. If you are interested in what successful companies are doing, feel free to read about those companies but do not waste your time following individual stocks for your own investments.
Get rich quick schemes – There is a ton of information out there about day trading stocks, stock options and other assets as a way to get rich. Do not waste your time with any of this. The odds of success are extremely low and the investment of time is massive.
The doom and gloom stories – Most of the biggest and boldest financial stories include the reasons behind the next big economic or stock market crash. As humans, we are built with a negativity bias so we are all suckers for doom and gloom stories. Your local news station uses the same approach to their evening news broadcasts. No one can predict upcoming financial crises with any consistency and nobody is ever held accountable for their inaccurate forecasts. Ignore these stories. They will not come true and they will only upset you. The rosy and positive forecasts will also be wrong but they will at least make you feel better.
Anyone promoting investments in alternate asset classes. Ignore the many stories you will see that promote the benefits of investing in commodities like gold, silver, bitcoin, lithium, and international currencies. Investing in these things is gambling and not investing.
We all have busy lives and you can gain time in your day by not wasting any of your precious time on stories like these.
For investing purposes, there are only a few things that you should pay attention to.
The performance of the major market indices like the S&P 500 and the Nasdaq. The Dow Jones Industrial average is the oldest and most frequently mentioned stock market index, but it does not mean that much since it only contains the stocks of 30 companies. The Russell 2000 index is made up of small company stocks and is less meaningful to investors.
Macroeconomic data like unemployment, inflation and economic growth (the GDP). These statistics are reported monthly and get a lot of headlines so they are pretty easy to follow.
Your own saving and investment plan. Focus on the things you can control like how much money you are contributing to your 401K. Once a year, you should review your retirement account and your retirement account projections to the age of 65. Are you getting the full company match? Can you increase your 401K contributions?
There are very few things that you need to pay attention to in the investing world and to follow these few items will take very little of your time. By ignoring the other nonsense, you will find you will have more time in your day and your emotional health will improve.
Happy Investing,
Phil
Disclaimers The Beyond Buy & Hold newsletter is published and provided for informational and entertainment purposes only. We are not advising, and will not advise you personally, concerning the nature, potential, value, or suitability of any particular security, portfolio of securities, transaction, investment strategy or other matter. Beyond Buy & Hold recommends you consult a licensed or registered professional before making any investment decision.
Investing in the financial products discussed in the Newsletter involves risk. Trading in such securities can result in immediate and substantial losses of the capital invested. Past performance is not necessarily indicative of future results. Actual results will vary widely given a variety of factors such as experience, skill, risk mitigation practices, and market dynamics.
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