Time to reassess throwing our money into black boxes

IT can be a lot of hard work to pick specific stocks, bonds and funds to invest in.

Knowing this, bank relationship managers and financial advisers reach out with offers to simplify your investing life.

For those of us who cringe at the thought of human contact (and constant calls), robo-advisers appear to be the perfect solution.

With their ads plastered everywhere in train stations and their promo codes easily found from close friends, the likes of Endowus, Syfe and StashAway have gained significant mindshare among young people.

Yet, how do we know that these are the best services to park our money with?

In an informal open-ended poll among my own friends, someone said to compare annual fees. Another highlighted app user-friendliness.

Yet another said that he was fine with any service as long as it is regulated by the Monetary Authority of Singapore.

"I don't really have the time or energy to care that much, I'm not a day trader," he said.

Certainly, these services generally allow investors to buy into diversified portfolios that they can generate returns from with relatively low annual fees and starting capital.

Unfortunately, there is more than meets the eye and these friends of mine have been throwing their money into black boxes they do not fully understand.

Chuin Ting Weber, chief executive and chief investment officer of financial advisory and NTUC social enterprise MoneyOwl, likens different robo-adviser portfolios to different roller-coasters where every rider has a stop button, through which riders can withdraw their money at any time.

These different "roller-coasters" may be more or less scary depending on factors such as their asset allocation into bonds and equities, which you indirectly choose based on your ability and willingness to take risk.

Don't panic on the roller coaster

With equities generally being more risky than bonds, a 100 per cent equity portfolio would be a scarier roller-coaster that gives greater returns over a longer period of time.

For context, we could take the example of the MSCI All Country World Index (ACWI), which tracks more than 2,900 large to mid-cap companies across 48 developed and developing markets.

During the global financial crisis, the index fell by 56.5 per cent from peak to trough between May 2008 and March 2009 before recovering to its May 2008 peak in October 2013.

An investor who invested in an equity-heavy portfolio in April 2008 would have had to steel his heart and stay invested with the understanding that stock markets do eventually recover.

Similarly, an investor who may want to buy a house in the next 3 years or who may not have comprehensive medical insurance should not invest in an equity-heavy portfolio only to withdraw his money prematurely, potentially in the middle of a market downturn.

"If we look at the 100-year history of markets and you want to be quite certain, you can allocate fully into equities, provided you are prepared for it, and (staying invested for) 15 years would be quite safe," Weber said, noting that investors who prematurely withdraw their funds and push the stop button would fall out of the roller-coaster and "die".

"An adviser's main job is actually to hold your hand and remind you that you've done the work to assess your ability and willingness to take risk and... over time, the market will calm down so don't panic now," she said.

Aside from their ability to take risks, investors will also need to gauge their willingness to take risks.

Should you actually take on less or more risks?

However, Christopher Tan, founder and chief executive of financial advisory company Providend noted that willingness to take risks is very subjective.

"Let's say you have a high need (for returns), high ability and low willingness to take risks. If you go to the robo-adviser and key in all of these answers, it is quite likely that you may get a balanced portfolio of 60 per cent equity, 40 per cent bonds with a trade-off in the form of lower returns.

"I would argue that that might not be the correct advice. I would need to coach you to raise your willingness to take risks... by showing you evidence about the stock market," he said.

In such cases, the user experience of the different robo-advisers has a part to play too.

For instance, when I tried applying for a StashAway portfolio, I thought I was being brave by selecting higher-risk and sliding to the highest risk portfolio, in which its value could fall by 36 per cent in any given year.

Still, its allocation of equities of 64 per cent could be considered relatively balanced.

In contrast, Endowus asks what is the worst 12-month percentage loss I could take in my investment portfolio.

The scale goes up to a maximum of 60 per cent potential loss, with an allocation of 100 per cent equities.

Even then, its description for the portfolio was "maximise returns by taking greater risk" with no mention of staying invested over the long term even if investors see losses.

To be fair, these robo-advisers have helpful articles on their sites about these topics. Helplines are also available for investors who need help gauging their risk.

Still, I believe that it is quite unlikely that any novice investor would search out these articles unless they are placed front and centre within the onboarding process.

Millennial and Gen Z investors like myself who avoid human contact like the plague will never pick up the phone and call someone if we did not absolutely have to either.

In addition, Tan noted that to choose the right robo-adviser, investors should take into account the investment philosophies of these advisers. This is because they all involve some form of active management, compared to passive funds which seek to "buy the market".

Taking a stand

Asset allocation is crucial as studies have shown that it accounts for much of the variation in investment returns.

An oft-cited 1995 study by Gary Brinson, Randolph Hood and Gilbert Beebower examined data from 91 large US pension plans from 1974 to 1983 and concluded that investment policy accounted for, on average, 95.6 per cent of the variation in total plan return.

Referring to the composition of the MSCI ACWI, which is widely used as a benchmark for the performance of global equity funds, it is clear that a number of robo-advisers have made asset allocation decisions on behalf of investors.

Syfe's Equity100 portfolio is overweight in US and China equities and underweight in Japan and UK equities.

Endowus is overweight on US and Japanese equities and underweight in UK and Canada equities.

Meanwhile, StashAway made the controversial decision to slash its Chinese exposure in its clients' portfolios to between 0 and 0.4 per cent on Mar 14.

In light of the risk of secondary sanctions due to China's position on the Russia-Ukraine conflict, the company deemed Chinese shares "uninvestable".

This came after it had maintained or increased its positions in China during an earlier re-optimisation exercise last July, when a crackdown on tech companies in the country crushed valuations.

While such allocation decisions aren't necessarily bad, Tan noted that investors should understand and be comfortable with their robo-adviser's investment philosophy. Both parties will share some responsibility for any under or overperformance of the funds.

Set your own financial goals

If, at this point, you feel completely overwhelmed by how daunting investing is, that is because it can be the case without some guidance.

Yet, it is not clear to me that robo-advisers can provide adequate advice on how you can meet your financial goals, whatever they may be.

Although Weber and Tan both suggested that do-it-yourself investors like myself can simply bypass these robo-advisers to buy London-domiciled global bond and equity ETFs, I cannot advise you on your risk level any better than a robo-adviser can.

Instead, this should be a wake-up call for investors to hit up MoneySense and Investopedia to find out how you can set your own financial goals and how best you can invest to meet them.

While these robo-advisers are helpful in that they give you a diversified portfolio for relatively low annual fees, they should not be the be-all and end-all to your financial security.