Robo advisor illustration


I am sharing an older WSJ article on Robo advisors below – seems to be the “rage of the day” in the investment market. I have not studied each individual Robo advisor strategy in detail yet, but my first impressions are: 1) Robo advisors aim to shift the focus from stock (or security) selection to asset allocation, 2) Your individual asset allocation would be driven by your answers to their interview(s), 3) Your answers to interview questions will be driven by your understanding of your own goals and investment behavior, as well as implied expectations about how various asset classes perform over time from a risk/return perspective.

Given this, two questions arise: 1) how well do you think you know yourself, in terms of your risk tolerance (I would argue most people probably don’t have a clue)? and 2) who is held responsible if future asset correlations (and covariances) diverge from their historical levels, and this causes unexpected investment results?

Aside from the above, the most troubling part about this for me personally is that handing over your hard-earned assets to a Roboadvisor means that you are implicitly subscribing to Nobel-prize winning Modern Portfolio Theory (MPT) and Capital Asset Pricing Model (CAPM), which together postulate that higher investment returns cannot be had without underwriting higher risk (as measured by volatility, i.e. variance) – which is the exact opposite of my (and Warren Buffet’s, Seth Klarman’s, Ben Graham’s) value-investing philosophy.
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