What is a Robo-Advisor?

The Year is 2065. Your Great Amazon Advisor bought you three new items off Amazon last night. A Great Amazon Robot Shampooer, A Great Amazon Robot Teethbrusher, and A Great Amazon Robot Eyeglass Cleaner. Your Great Daily Amazon Schedule is full. You ask your Great Amazon Advisor about your stock portfolio, and your Great Amazon Advisor assures you your stocks are doing amazing. No need to check.

Last week, Mike talked about using a real, human financial advisor. If you’re thinking that the price of a human advisor is too high, but you still don’t want to worry about investing, a Robo-Advisor might be up your alley. Since Mike and I use Fidelity and Schwab, I will detail both options of robo-advisors.

Fidelity calls their robo-advisor ‘Fidelity Go.’ These accounts have a $10 (technically $0 but it won’t start trading until you have $10 in it) minimum and are free for balances under $25,000. Balances over $25,000 automatically incur a .35% fee but come with unlimited guidance from a Certified Financial Planner.

Schwab offers ‘Intelligent Portfolios.’ These accounts require a minimum investment of $5,000 and are completely free. For balances over $25,000, you can choose the free portfolio or the Premium option and pay a $300 one time fee and $30 a month for unlimited guidance from a Certified Financial Planner.

Each account works about the same way: you answer several questions about financial goals and current situation, you dictate timeline and when you will need the money, and you tell them how much risk you are willing to assume. The robo-advisor then makes a portfolio balanced between stocks, bonds, commodities, and cash based on your answers. The big benefit is how the robo-advisor constantly balances your portfolio to ensure you stay within your desired allocations. Without the robo-advisor, you have to spend a lot of time ensuring as your stocks grow or shrink, you sell and buy to continually rebalance your portfolio.

Since I have a Schwab Portfolio (and their website provides more detail), I will describe what the end result looks like. I am positive the Fidelity robot does something similar, but they don’t provide as much fidelity (see what I did there? Word play). My guess is they want you to feel like the robot is more personalized where Schwab admits it’s more generic.

A Schwab Intelligent Portfolio offers 3 investment strategies: Global, US Focused, and Income. If you want exposure to all international markets or just US companies, you can set that preference. You can also list specific countries you want to avoid. If you are closer to retirement and need fixed income, you can do that too! Remember Mike talking about the 4% withdrawal rule? The robot takes care of that for you!

After you determine your strategy, you then select from 6 risk profiles from Conservative to Aggressive Growth. Since I am a long way away from retirement and very tolerant of risk, I am in the aggressive growth profile. Currently, my portfolio has 79% stocks, 11.7% fixed income (bonds), 2% commodities (gold and other metals), and 7.3% cash. This is an aggressive portfolio, not as aggressive as it could be though. You can update your risk tolerance at any time from the app or website. It is literally as easy as swiping left and right on a dating app.

Finally, you answer some questions on your timeline and if you will contribute monthly or not, and boom! You’re done!

Schwab Portfolio’s select among 51 ETFs in over 20 different asset classes to meet your goals. Some examples of classes are:

• US Large/Small Company - Stocks

• International Large/Small Company - Stocks

• International Emerging Markets - Stocks

• US/International REITs (Real Estate Investment Trust) - Stocks

• High Dividend - Stocks

• US Treasury Bonds - Fixed Income

• International Bonds - Fixed Income

• Inflation Protected Bonds - Fixed Income

• Gold and Other Precious Metals - Commodities

• FDIC Insured Cash - Cash

Here are some cons:

• The robo-advisor will not purchase individual stocks for you. It will only buy ETFs. For that reason, it is not as aggressive as a human advisor might be.

• You have no say in what and how much it buys unless you change your preferences on risk or international market exposure (which you can update at any time).

• If you need to withdraw any money, it takes at least three business days to process. You place the request, and the robot sells and transfers money back into your bank account.

Here are some pros:

• The robot continuously balances your portfolio to meet your goals. Whether you are closer to retirement wanting income or very young wanting growth, the robot can meet your needs.

• If your balance is over $50,000, you get free tax-loss harvesting. This means the robot sells assets that have lost money to cover any gains or dividends you earn therefore lowering your tax burden.

• You can rest easy knowing you have an extremely diverse portfolio with very little effort.

In February, 2022, I moved about 20% of my portfolio into a Schwab Intelligent Portfolio because I believe they are the future and all of the above pros. I call my robot Jeeves in honor of the amazing website AskJeeves.com.

Now for what we all care about, the results.

I’ve only had Jeeves for 19 months, and this is not long enough to make any true conclusions on results. I will share how it’s done anyway!

From February to December 2022, Jeeves was down 11.56%. Yikes… But! The S&P 500 was down 12.85%, the Russell 2000 (Small Company Index) was down 14.04%, the NASDAQ was down 25.9%, and international markets were down 11.28%. The diversification provided by Jeeves made my losses not as bad! In reality, the fact that 20% of my portfolio is in bonds, cash, and commodities is why my returns were not as bad.

From January to August 2023, Jeeves is up 9.47%! Awesome… But! The S&P 500 is up 17.75%, the Russell 2000 is up 12.1%, the NASDAQ is up 32.75%, and international markets are up 12.38%. The diversification provided by Jeeves limited my gains for the same reason it limited my losses.

Jeeves has given me a balanced portfolio with massive diversification across markets and asset classes. For the low price of $0, Jeeves set it all up for me. I have also learned about different ETFs by looking at the breakdown of holdings Jeeves bought. Is Jeeves perfect? No. We are at the infancy of robo-advisors. I believe by the time I am switching Jeeves to fixed income and starting retirement, he will offer even more services and potentially individual stocks.

I gave Jeeves control of 20% of my investments and am very happy with this decision. With Jeeves, I know that I am following the fundamentals of diversification for at least part of my portfolio. It is not sexy and the returns might not seem amazing, but this year, Jeeves is up 9%. If you can’t be happy with 9% growth because something else has higher growth, you’ll never be satisfied in the stock market.

*Sorry if this letter seems like a big ad for Schwab Intelligent Portfolios. I am embarrassed to say Schwab isn’t paying me for this. Not yet at least….

Over the next several decades, I am excited to watch Jeeves grow, shrink, change, and adapt. When our AI overlords take control in 20 years, maybe they will go easy on me since I trusted Jeeves with my money early on?

Call to Action

If your brokerage offers intelligent portfolios, check them out! If you want to automate and forget about your investments, this is an easy option.

What We’re Reading/Listening To:

Book - Chip War: The Fight for the World’s Most Critical Technology by Chris Miller. Are you tired of hearing about the ‘chip shortage,’ why your car needs 44,382 of them, and having no idea what the difference between tortilla chips and computer chips is? I was and this book answered all my questions. I listened to it on Audible and highly recommend it.

Debrief on Deck

Next Week, Mike is going to talk about how you can limit your tax bill in retirement without going off the grid in Costa Rica, although that option is appealing.

As always, please reach out to us with any questions or comments you have. You can reply directly to this email or find us on social media (X (formerly Twitter) and Instagram).

Until then, stay the course.

Disclaimer