Robo-advisor vs. human advisor

The robo-advisor platforms offered by companies like Wealthfront and Betterment are gaining in popularity. The low cost of investment management services is very attractive when compared to fees charged by human financial advisors. It leaves me wondering if financial advice from humans is on its way out.

Advances in artificial intelligence has already replaced some money managers at companies like Blackrock. Last October marked the debut of an AI powered equity ETF. The exchanged traded fund is run by IBM’s Watson, in other words, the new portfolio manager is a computer program. Most ETFs are passively managed and follow indexes or specific sectors in the S&P 500. The AIEQ ETF is an actively managed security that seeks to beat the market.

Here are four advantages that traditional advisors have over robo-advisors.

  1. Human emotions

Robo-advisors only have one job, to use algorithms to manage your investment portfolio. They are not designed to manage the emotional component of investing and building wealth. For traditional advisors, this is a daily role they fulfill. When markets decline or clients experience an important financial event, the traditional advisor is there to talk them down off the proverbial ledge and help them make a rational decision void of strong emotions.

  1. Accountability

Many people are capable of holding themselves accountable on their own but having someone else committed to helping you in the endeavor only ups your chances of success. Computers are certainly capable of creating tasks and sending you reminders but they have little to no flexibility in helping you devise an accountability system that truly works for you and is tailored towards your specific goals.

  1. Flexibility

Let’s face it; over time our lives can change quite drastically. You get married, have kids, buy a house or become unemployed. The list goes on and on. Each of these events creates what we call “money in motion.” When money is in motion, planning, adjusting and taking thoughtful action needs to occur in order to ensure a positive outcome. Over time, many discussions are required during this process and having a human expert helps you adjust and adapt as needed.

  1. One-size-fits-all vs. tailored service

Part of why robo-advisors are cheap, relative to financial advisors, is due to the fact that they are a streamlined, automated service. As great as this can be, it also creates a lot of limitations. Rather than being built and catered specifically to you and your current financial situation, robo-advisors are designed to serve the masses. This means a somewhat cookie-cutter, one-size-fits-all approach in their offerings.

Traditional advisors, on the other hand, can tailor the services and investment management style they provide according to your unique financial situation. (Insurance coverage, debt reduction, tax plan & estate planning)

Having worked as a financial advisor, I am somewhat bias and prefer the traditional advisor over the robo-advisor. However, a robo-advisor provides a service to a select group of clients and financial advisors provide services to a different group. Each cater to the preferences of their unique clientele.

 

 

Trump Tariffs are all about politics and not national security

 

Canada and Brazil are likely to bear the brunt of any tariffs on steel imposed by President Donald Trump. According to the department’s International Trade Administration, Canadian and Brazilian steel comprised 16 percent and 13 percent of U.S. steel imports as of September 2017. China is not one of the top 10 importers of steel to the U.S. (take a good look at the above pie chart)

Top foreign sources of aluminum included Canada (56 percent), Russia (8 percent) and the United Arab Emirates (7 percent) between 2013 and 2016, according to the United States Geological Survey.

In my humble opinion, there is little justification on applying a 25% tariff on steel and a 10% on aluminium based on national security. The majority of steel and aluminium that the U.S. imports comes from military allies.

Now, the timing on this tariffs are somewhat suspect with a congressional election in the 18th district of Pennsylvanian next week. In case you didn’t know, Pennsylvania manufactures a lot of steel. This is Trump country, he carried this district by 20% in the 2016 election. The race is so tight that Trump had a rally in Pennsylvania supporting Rick Saccone.

“Do me a favor,” he said to the large crowd gathered in a hangar at the Pittsburgh airport. “Get out on Tuesday, vote for Rick Saccone, and we can leave right now.”

Trump also using tariffs as a bargaining chip in NAFTA negotiations

Canada and Mexico received a temporary exemption from the tariffs. It will depend on whether the changes that are made to NAFTA will satisfy Trump.  The seventh round of talks in Mexico produced very little process. The final round of NAFTA talks are schedule in Washington sometime in April. The Trump tariffs will put extra pressure on Canada and Mexico to give Trump a deal that will help him get republicans elected this November.

President Trump’s decision to impose tariffs on foreign steel and aluminum likely precedes an exit from NAFTA, according to Goldman Sachs.

Stock Markets don’t like tariff wars

Tariffs will artificially boost input costs and increase the cost of imported finished products. The fear is an increase of inflation, leading to raising interest rates which would dampen economic growth. The other fear is that corporations will be unable to pass on an increase in input prices which could lead to job cuts.

I expect more tough talk on trade from President Trump because many American voters think that the wealthy will benefit the most from tax cuts. I believe that stock market volatility will intensify over the next few months.

 

It may be a good time to raise some cash and pick up some bargains.

 

Shedding some light on the violent stock market moves

Have you ever heard of the saying Be careful what you wished for? It turns out that traders wished to see some growth in average hourly wages, some inflation over deflation and yields on long duration bonds to go up. They got their wish which started a violent market correction.

Market watchers remain at odds over what tripped the sell switch. Primarily, the conversation comes down to fundamental vs. technical. In the days since the correction began the markets have recouped more than half the downside since the low point.

Plenty of theories, I call mine “The Domino Effect”

Inflation fears was the first domino to fall hitting the fear of raising interest rates. The next domino to fall was money managers and institutional investors were caught with a lot of leveraged positions. The sharp fall triggered margin calls causing massive sell orders. This initiated sell orders from funds that use technical analysis better known as quantitative funds. The last domino to fall was retail investors (who haven’t seen a correction in over two years) did some panic selling.

The Dow suffered two drops of 1,000 points. The fall seems big but the actual percentage was not extraordinary. There have been larger percentage drops in the past. In my 35 years of investing, I have experienced some worse percentage downward moves.

Rank Date Close Net change % change
1 October 19,1987 1,738.74 −508.00 −22.61
8 October 26, 1987 1,793.93 −156.83 −8.04
9 October 15, 2008 8,577.91 −733.08 −7.87

 

Is the correction over?

The market fundamentals haven’t really changed. U.S. corporate earnings are getting better and the Trump tax cuts should boost economic growth. Plus there is systematic economic growth happening in both developed and emerging markets.

I am not an expert on technical analysis and I don’t believe in buying or selling based on lines on chart. However, pension funds, hedge funds and quantitative funds use technical indicators to manage a large amount of investors’ money. 

Analysis from Kensho, a quantitative analytics tool used by hedge funds, looked at seven occasions of similarly sharp drops in the S&P 500 beginning in 1987. The study found that following such a drop, stocks tended to fall further, with a median decline of 2.29 percent one week later and a drop of 1.68 percent two weeks later.

 

This is the ABCD bullish chart:

This is the year to date chart of the S&P 500:

In my humble opinion, corrections tend to last more than nine days. I put some money to work last week and plan on dollar cost averaging on some more positions. If you are new to my blog, consider reading:  Dollar-cost averaging using an option strategy

What do you think? Are you buying the dips or selling into the rallies?

Market crash or correction could be a good time to buy

 

 

My blog post last week warned of a possible correction due to Trump’s future withdrawal from NAFTA. I believed that a pullback was in the cards but you never know what will trigger a sell off.  The pullback started to get some steam on Thursday afternoon when the Atlanta Fed released their projections for first quarter GDP growth to come in at 5.4 per cent!

That really spooked the stock market since 4th quarter GDP was only 2.6 percent which was below consensus estimates of 3 percent. The Friday’s job numbers fueled the downdraft even further as investors digested a stronger-than-expected jobs report where the average hourly wages rose more than expect.

Higher wages can point to higher inflation, which, in turn, could lead the Fed to raise interest rates more aggressively. Those concerns allowed the 10-year Treasury yield to rise above 2.8 percent.

Keep in mind that the S&P 500 has risen 6 percent in the year to date and is on track for its 10th straight month of gains. At these levels, this would be the best January since 1997. The S&P’s relative strength index ended last week at 90, its highest level on record. (Overbought territory) Its price-to-earnings ratio hit 18.44 times forward earnings this week, its highest level since May 2002.

Two other factors that may have contributed to the main benchmarks suffering their biggest one-day drops in more than a year and posting the steepest weekly losses in about two years.

  1. Friday marked the last day for Janet Yellen as the head of the Federal Reserve, giving way to her successor, 64-year-old Jerome Powell. Powell’s entry adds uncertainty into the markets.
  2. The politics in D.C. with the release of the Nunes memo adds political uncertainty as to whether the business friendly republicans will lose in the November elections.

The Dow Jones futures market points to a negative opening on Monday. There could be even more selling pressure near the end of the week because of a possible government shut down over Trump’s immigration demands.

Why you shouldn’t worry

  • The Atlanta Fed was also optimistic about the 2017 first quarter, estimating growth at one point to be 3.4 percent, where the final reading came in at 1.2 percent.
  • Higher wages doesn’t always lead to higher inflation. Consumers could opt not to spend but pay down debt or increase their savings.
  • Over the long run, good quality stocks will outperform bonds.

In my thirty plus years of investing, I have seen many bear markets and corrections. Ask yourself a simple question. How many millionaires do you know that became wealthy by investing in savings accounts?

What is on my shopping list? U.S. financials and technology.

 

Scary Financial Facts for Halloween

 

It’s that time of year when scary things come out on Halloween. However, when you open your door on October 31, will you be confronted by anything scarier than these hair-raising financial horror stories?

Will debt destroy your future?

  1. Student loan debt has reached $1.45 trillion dollars in the U.S. and $42.9 billion in Canada. U.S. graduates owe on  average of $37,712 and $27,000 for Canadians.
  2. Credit card debt is increasing in both countries. Americans carry an average of $16,000 and $4,100 for Canadians
  3. 107 million Americans have auto loans for a total outstanding debt of $1.2 trillion. It is estimated that 40% of the 120 billion dollars in auto loans in Canada are financed for 7 years or longer.
  4. Mortgage debt in Canada is a bigger problem than the U.S. because mortgage interest is not tax deductible. Average mortgage in Canada is around $200,000 (much higher in cities like Toronto & Vancouver) and $192,000 in the U.S.

Will someone steal your identity? 

First we find out that the Yahoo hack in 2013 exposed the information of every single one of their 3 billion accounts and then we find out that a data breach at Equifax exposes the personal information of 145.5 million people. Is there a single American who hasn’t been hacked yet?

The odds are great that your personal information is for sale to identity thieves or already in their hands. Can you foil them with credit freezes and other ID protection measures before it’s too late? Is it already too late? Does your VISA card contain mysterious purchases for 10 large screen TVs from Best Buy?

U.S Health Care Nightmare

Who knows what horrors await you if you become sick and your insurance premiums are too high for you to afford? Average out-of-pocket medical costs continue to rise, topping $10,000 in 2016. Meanwhile, premiums continue to rise on the health care exchanges.

Over the past four years, premiums in the individual marketplace have more than doubled. As insurers back out of some markets and political uncertainty reigns, premiums on the state insurance exchanges continue to rise rapidly. For example, rates in Georgia are up by 57%.

Scary lack of retirement savings

According to a report from the Economic Policy Institute (EPI), the mean retirement savings of all working-age American families, which the EPI defines as those between 32 and 61 years old, is $95,776. Almost 40 million households have no retirement savings at all.

Only 65% of Canadians are saving for retirement and on average have about $84,000 in retirement accounts. (RRSP & TFSA)

Frightening Canadian Energy Policies

  1. No access to foreign markets for oil & gas (besides the U.S.)
  2. Cancellation of Energy East pipeline (buying oil from the Middle East, selling discounted oil to the U.S.)
  3. Construction delays in Trans Mountain & Keystone XL pipelines
  4. No accountability for carbon tax revenue (how is this money spent?)
  5. 4 billion dollars of extra interest payments for reduced hydro rates in Ontario

Release the Nukes

What list of potential horrors would be complete without the prospect of nuclear war? The current tense relations between the U.S. and North Korea make that horrible concept more plausible and in addition to the terrible death toll and destruction of property, the financial impact on the world economy would be hard to imagine.

Remember the famous quote of Albert Einstein, “I know not with what weapons World War III will be fought, but World War IV will be fought with sticks and stones.”

Now remember the leaders who have their fingers on their respective nuclear buttons. ARE YOU FRIGHTENED YET?

HAPPY HALLOWEEN!