Robo-Advisors Peddle Investment Mistakes As Strategies

Updated on

Risk Assist automatically sells when your stocks drop, and then rebuys later after they recover, turning a classic investment mistake into a financial product

One of the most important things a financial advisor can do is help people resist the urge to sell when things get rough, only to reinvest at a higher price a few months or years down the road. But it’s still no surprise that robo-advisors are helping people automate their worst investing behaviors. The latest example is something called Risk Assist from TradeKing Advisors, a financial product that seems like it’s designed to underperform.

Buffett mocked a similar strategy way back in 1987

“Should the stock market take a turn for the worse, Risk Assist responds by shifting a client’s portfolio allocation [away] from investments that are sensitive to downward market conditions,” the company writes. “When the market is back on track, Risk Assist gradually restores a client’s portfolio to its original allocation.”

It’s kind of funny to compare this description of Risk Assist with Warren Buffett’s description of stop-loss orders that were partially responsible for the 1987 stock market crash.

“The less these companies are being valued at, says this approach, the more vigorously they should be sold. As a ‘logical’ corollary, the approach commands the institutions to repurchase these companies — I’m not making this up — once their prices have rebounded significantly,” wrote Buffett.

The strategy behind TradeKing’s latest product is something that Buffett considered so foolhardy he could hardly believe it was really happening. In case his objection isn’t clear, when you set a stop-loss on a security you’re essentially saying that you’re a buyer at $20 and a seller at $10, for example. A sudden price drop may cause you to re-evaluate your own valuation, but if you stand by your original assessment you should be buying more, not selling.

Robo-advisors let people automate their mistakes

There’s nothing wrong with someone wanting to get easy, low-cost exposure to the stock market – Buffett has repeatedly recommended low cost index funds for retail investors. Robo-advisors give people the worst of both worlds: the automation means that people don’t have to spend any time thinking about their investments because an algorithm will make poor decisions on their behalf.

And in the case of Risk Assist it only costs you 0.5% of your portfolio every year on top of TradeKing’s other fees, a couple of times higher than a low-cost index fund and not that far off from an actual financial advisor.

Leave a Comment