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.

 

 

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Trudeau is whistling by the Canadian graveyard

According to Wiktionary:  “whistle-past-the-graveyard” is to attempt to stay cheerful in a dire situation; to proceed with a task, ignoring an upcoming hazard, hoping for a good outcome.

In my humble opinion, this idiom describes our Prime Minister perfectly. The Canadian government missed a golden opportunity to respond to the Trump tax cuts in the February 2018 federal budget.  The United States, our largest trading partner, has made investing in the U.S. more attractive than Canada. Corporate tax rates in the U.S. are 5% lower than Canada and more important is the 100% deduction for new capital spending.

The Canadian dollar has fallen in value from $1.2586 at the end of February to $1.3079 today. A clear sign that foreigners are taking their money out of Canada.  The uncertainly regarding the successful re-negotiation of NAFTA is hurting our dollar and is also responsible for the lack of capital spending in Canada.

Our factors that make Canada less competitive than investing in the U.S.

  • Carbon taxes have increased energy costs.
  • February budget increased taxes for small businesses and individuals.
  • Canadian oil is being sold at a discount by $20 to $25 a barrel costing billions of dollars in lost revenue to Canadian oil companies and loss of tax revenue.
  • Kinder Morgan’s Trans Mountain pipeline expansion is being delayed by protesters.
  • Many LNG projects have been scrapped. Meanwhile, this sector is booming in the U.S.
  • The housing market is slowing down due to a 15% foreign buyer’s tax, tightening mortgage rules and higher mortgage rates.
  • Tariffs on softwood lumber, pulp & paper and solar panels. (Steel & aluminium tariffs could become permanent if Trump doesn’t like the NAFTA deal)

No surprise that the Toronto stock exchange is down 4% year to date while the S&P 500 is flat and NASDAQ is up 6%. The Trump tax cuts have already boosted employment and capital spending should kick in the second half of 2018. However, there are still are plenty of risks investing in the U.S. with the Trump circus in Washington. Possible trade wars leading to inflation and higher interest rates.

It is going to be very challenging to make money in 2018!

I am still a Canadian Bear

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.

 

Both young & old should make a budget

Contrary to popular belief, money has no value what so ever until you spend it. It is what you spend it on that has value. The value we place on money is dependent on what we think we can buy with it. The money you are paid as a salary is just a number written on a pay slip or is deposited directly into your bank account in exchange for the service you provided to your employer.

Why is budgeting so important

Since the value of money comes from its buying power, planning your spending ensures that you have enough money for things that you need and for things that are important to you. A spending plan will also keep you from spending money that you don’t have or help you get rid of unwanted debt. (Not all debt is bad)

The buying power of money is determined by the supply and demand for goods in the economy. Inflation in the economy causes the future value of money to reduce its purchasing power. A budget helps you figure out your short and long term goals plus measures your progress.

Budget Categories

  1. Shelter – rent, mortgage, property taxes
  2. Utilities – heat, hydro, water, cable, internet, cell phone
  3. Food
  4. Transportation – bus pass, car payments, gasoline, repairs
  5. Clothes & Accessories
  6. Gifts
  7. Insurance – car, home and life
  8. Entertainment – including vacations
  9. Emergency fund
  10. General savings – major purchases, debt repayments, retirement

It is really important for seniors to have a budget. You don’t want to outlive your money and be a financial burden to your children. There are three stages of retirement, “go go”, “slow go” and “no go”.

You tend to spend more money in the “go go” stage since today’s seniors are healthier than previous generations. Plus, life expectancy has increased so seniors will also have more leisure time.

As more people are living longer, the “no go” stage in retirement can become very costly due to the increasing risk of health problems. The risk of developing a cognitive disease like Dementia or Alzheimer increases with age. Costs for caregivers, assistance living and nursing homes are not cheap. (The cost for my elderly mother’s caregiver is about $20,000 per year)

Why people don’t budget

  1. They’ve got the wrong idea. Budgeting’s got a reputation for being too restrictive; you work hard for your money, why shouldn’t you be able to spend it as you see fit? But it isn’t as terrible as it seems. In fact, when you stick to a budget, you’re likely to have even more money left over to do with as you please. Budgets shouldn’t be about making big restrictive changes. Rather, when you examine your finances, you see small ways to make changes that will have big effects.
  1. It is intimidating. Got a vice that you don’t want to give up? Scared that if you make a budget you won’t be able to stick to it? There are tons of reasons you might fear drawing up a budget, but that shouldn’t keep you from trying! When you create a budget, you’re enabling yourself to find and fix the financial mistakes you make, rather than ignoring them and hoping they’ll go away by themselves.
  1. It is time-consuming & boring.Unless you have a passion for spreadsheets, chances are that budgets bore you to tears. You might not want to budget because the actual act of budgeting just seems like row upon row and column upon column of money that’s no longer yours.
  1. They think they don’t need to. In today’s economy, not many people can say that they don’t need to budget because they have enough money. Even if this is the case for you, a budget can always help you to save more.
  1. They think a budget can’t help. Most of us have heard the adage ‘the first step to recovery is admitting there’s a problem.’ Debt is a very personal issue and it can be difficult to admit, even to yourself. There are a variety of ways to help clear your debt and drawing up a comprehensive budget is the best way to start doing this.

I just put the finishing touches to my 2018 budget, how about you?

A fun exercise: Stock picking verses indexing

The average person is afraid of investing in individual stocks and 61 percent of millennials say they’re afraid of even getting started. Despite the fact that investing in the stock market has been shown to be the most efficient and effective way of turning money into more money.

Financial website How Much took a look at some popular stocks in 2007 to find out how much a $1,000 investment in each would be worth now, as of October 31.

In the above picture, the blue dots are equivalent to the $1,000 initial investment, so they are the same size for each company. The pink ones represent the current total value of the investment, so each of those varies.

The larger the pink circle, the more your investment is worth,” according to How Much. “If the pink fits inside the blue, then you lost money. The graphic assumes that you took any dividend paid out in cash and did not reinvest into the company by buying more stock.”

Warren Buffett, Mark Cuban and Tony Robbins all agree index funds are a safe bet, especially for new investors, since they fluctuate with the market, stay pretty constant and eliminate the risk of picking individual stocks. However, if you were lucky enough to pick these 15 American stocks, your $15,000 would have been worth $99,291 compared to $26,741 for the S&P 500 (SPY).

What if you missed owning the two top performing stocks Netflix & Amazon? Your total return would have been $34,927 assuming that you didn’t panic during the great recession. There are other household names like Facebook or Visa that could have help you beat index returns.

Keep in mind, it is easy looking backwards! I do remember getting phone calls and emails from formal clients and co-workers looking for advice during the market meltdown of 2008-09. It is hard to do nothing and hold on to your investments when markets are down 35% to 45%!

My point is simple, even with the worse meltdown (2008-09) since the great depression of the 1930’s, you would have still made money investing during the past ten years. Investing in the stock market is still the most efficient and effective way of turning money into more money.

 

 

 

Why you should look under the ETF’s hood

A fund’s name might seem like a good starting point for gaining an initial understanding of how it is constructed. Unfortunately, names turn out to offer little help for evaluating funds. There is simply no universally accepted system in use by ETF providers and research to classify funds. For example “Infrastructure” would seem to have something to do with the amenities, roads and power supplies needed to operate society.

Names can be deceiving! To illustrate, I went to one of my favorite ETF provider’s web site to look under the hood. I was looking to find some discrepancies. It took some time but the geographic allocation in the fact sheet on the BMO Global Infrastructure Index ETF (ZGI) wasn’t global at all but had the majority of their holdings in North America.

  • 66.02% United States
  • 25.16% Canada
  • 6.71% United Kingdom
  • 1.56% Mexico
  • 0.56% Brazil

The top ten holdings also have a lot of pipeline companies who pay construction companies to build the actual  infrastructure.

  • Enbridge 10.07%
  • American Tower Corp 8.82%
  • National Grid Plc 6.71%
  • TransCanada Corp 6.68%
  • Crown Castle Intl Corp 6.07%
  • Kinder Morgan 5.87%
  • P G & E Corp 5.17%
  • Sempra Energy 4.25%
  • Williams Cos 96%
  • Edison International 3.82%

It takes years for pipeline companies to benefit from any new capacity to come on line. On the other hand, companies who specialize in construction & engineering like SNC-Lavalin or Aecon would see immediate revenue growth. I would recommend looking for another infrastructure ETF that had more global exposure with holdings of construction & engineering type companies.

Another example is the BMO S&P/TSX Equal Weight Industrials Index ETF (ZIN) which has a small discrepancy. The fact sheet says it has 26 industrial holdings but two of those holdings include airlines. (Air Canada 5.46% & Westjet 4.13%)  Now both of these companies buy industrial products but they specialize in transportation.

Here are some key steps all investors should take when evaluating ETFs:

  1. First, decide if you are going to be a do-it-yourself investor or work with an advisor. As their name suggests, ETFs are traded on exchanges, so they can be bought and sold like stocks through a discount brokerage.
  2. Make sure you understand the index underlying the ETF you are considering. Focus on how the index is constructed, what it tracks and how long it has been around. A longer record will reveal how the index responded to different market conditions.
  3. Check the fund’s fact sheet, are the underlying holdings and geographic allocation accurate? How does the exchanged traded fund compare with similar funds from other providers?
  4. Avoid ultra-short and leveraged ETFs, leave those to professional traders.

Ultimately, the proper implementation of ETFs in a portfolio requires, like all investment decisions, due diligence, caution and persistence. ETFs can offer many attractive features but their long-term value depends on how well they fit into an individual’s portfolio.

To evaluate an appropriate fit, investors have to be prepared to look under the hood.