The Short-Term Nature of Robo Portfolios

Stephen J. Huxley
John Y. Kim

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Robo advisors have become what textbooks refer to as “disruptive” advancement: the traditional way of doing business in an industry changes dramatically, often due to the introduction of new technology. While technology has had an impact on the financial services industry, it is the quality of the robo advisors’ investment advice that will determine whether they become a lasting paradigm.

One of the many considerations involved in investment strategies is the appropriate time horizon. The asset allocation of robo advisors suggests they are more consistent with equity portfolios structured for short horizons. When evaluated in the context of time segmentation, the equity portfolios recommended by robo advisors for “moderate” investors were most strongly correlated to portfolios designed for one to three years. From a time segmentation perspective, short term does not imply that the portfolio is traded frequently, but rather that it is comprised of equity asset classes that tend to perform better in the short term at the expense of better long-term performance. Most financial planners emphasize that lifetime planning, by definition, should focus on the long term.

Fairly evaluating the investment performance of robo advisors is challenging. It is a dubious practice to judge any investment opportunity that has yet to produce a meaningful track record. Most of the robo portfolios are so new that it is difficult to make comparisons over a sufficiently long period.

However, to their credit, robo providers publish the allocations and funds they use in their portfolios. The allocations change but not precipitously. They are a little different in 2016 compared to 2015 but by less than a few percentage points for any one asset class. They will likely be a little different again in 2017 and in the future, but the changes are minor, at least so far, suggesting they intend to follow a strategic rather than a tactical asset allocation approach.

The open publication of their portfolios reveals the asset classes and allocations they use. Consistency in their allocations and a track record of 30 years or more for these asset classes permits estimates of how well their portfolios would have done for much longer spans of time than would otherwise be possible.