Robo-Advisors Like Lemmings?

Note from the CEO:  Say what you will about Lemmings, there is always relative safety in numbers. Same as corporate committees. Can’t blame just me for bad decisions (or investing choices) cause everyone did it. Great read to point out the obvious. Actually, Lemmings are cute……..investors not so much.

AndI’ll be darned. There are others out in the big wide world that think that markets can actually (gasp) go DOWN.  And, over the past several years, more and more robo-advisors have come into the fore with the majority of users of these passive forms of investing being new investors that have not experienced a down market. Like Lemmings (substitute the word investors) all following the pack, the new rage is ETF’s and long term passive investing.

Remembering that the robo-portfolios are designed by actual humans, and “graded” against a benchmark, one wonders what happens when the benchmark goes down and the robos sell with it as programmed. The lemmings (real ones) might actually have a higher survival rate.

“There is a popular misconception about Lemmings. It is said that they commit mass suicide by jumping off cliffs when their population becomes too dense. However, this is quite far from the truth. Instead of committing suicide Lemmings will seek pastures new when their environment no longer serves their biological urges. As Lemmings can swim, they then may choose to cross a body of water in search of a new habitat. However, when doing so, many may drown as the fjords or rivers are too wide, thus stretching the Lemmings’ physical capabilities beyond their limits.

Financial markets and Lemmings – What is true, however, is that large populations of Lemmings move in one group, and it is this group migration that influences the moves of the individual Lemming. Once a significant share of the group has entered the water, the other Lemmings are likely to follow suit, inconsiderate of the potential fatality of their choice. Financial markets are not so different. Benchmarks are extensively being used and research in the field of behavioral Finance has yielded strong indications that herding behavior is rather pronounced. The broadly hailed Robo-Advisors of the Fintech age are likely to amplify this problem.

Mushrooming Robo-Advisors – Robo-Advisors are sprawling across the globe. A Robo-Advisor can be defined as a self-guided online wealth management service that provides automated investment advice at low costs and low account minimums employing portfolio management algorithms. Clearly, while there are exceptions, Robo-Advisors typically build client portfolios from ETFs, more specifically from equity ETFs. This model has worked fairly well as long as the stock markets were going up.”

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