(PUB) Investing 2015

ROBO ADVICE Rise of the Machines, and of Errors

three years or so of performance for the ETF portfolio and my Model Portfolio . I say “three years or so” because the graph ran for a 37-month period, which seems rather random. Anyway, I was thrilled to see that the computer showed the performance of the Model Portfolio was 18.75% per annum versus 14.23% for the Vanguard portfolio. The Model Portfolio runs a little more expensive on measures like price/ sales and price/book, etc. and has a smaller allocation to emerging markets than Vanguard’s portfolio. Nothing out of the ordinary or surprising. I did find the Modern Portfolio Theory stats showing a negative alpha of -0.91 for Vanguard’s portfolio versus a positive 2.91 for my Growth Model Portfolio ’s a bit strange. Partly it’s because the two portfolios are compared to slightly dif- ferent benchmarks, which you wouldn’t know if you didn’t click on the “bench- mark” link at the bottom of the table. Vanguard’s index funds actually “lose” alpha to straight indexes because of their expenses. The portfolio managers in the Growth Model Portfolio , how- ever, add alpha, or in simple terms, they add stock-picking smarts. Then there’s the diagram show- ing how evenly distributed the port- folio’s “stock sectors” are allocated. The Vanguard ETF model was actu- ally slightly askew with an overweight to cyclical stocks, while the Growth Model Portfolio was spot-on evenly allocated. Now, here’s where things begin to

10%, so there’s a 90%/10% model, an 80%/20% model and so on. These model portfolios use Vanguard’s “core” ETFs, Russell index ETFs, S&P index ETFs and CRSP index ETFs for the equity side of the ledgers. That’s 44 dif- ferent model portfolios to choose from. I figured I’d just test-drive Vanguard’s Portfolio Analytics Tool based on its most basic and most heav- ily recommended ETFs used in the “core” portfolios. The Vanguard Core 100/0 portfolio allocates 68.6% of assets to Total Stock Market ETF , 29.4% to Total International Stock ETF and 2.0% to a money market fund. Essentially it’s 100% stocks. With the Growth Model Portfolio holding just 3% or so of its assets in my cash substi- tute, Short-Term Investment-Grade , this seemed the appropriate pairing. So, I punched in the ticker symbols and allocations for the Growth Model Portfolio and selected Vanguard’s 100/0 portfolio for a comparison. It couldn’t have been simpler. But the output was anything but simple. And much of what I got was completely random. On top of which, the report that appears on your screen is not the report that appears when you ask for a downloadable PDF document. Let me give you just a few examples of the silliness that is this “tool.” Let’s start at the top. Of course there’s the obligatory comparison of expenses, 0.09% versus 0.36%, and pie charts showing allocations. And then there’s a line graph comparing the past

DO YOU REALLY WANT TO hand your portfolio off to a machine? Think really hard about that. Much is being made these days of the rise of the robo-advisers, those automated and semi-automated finan- cial advice and portfolio manage- ment services that Charles Schwab, Betterment, Wealthfront and Vanguard, among many, are now offering. Vanguard, in particular, has been transitioning billions of dollars of investor assets from passive alle- giance to its funds, to paid clients of its Personal Advisor Services group. No doubt, you’ve noticed that Vanguard is promoting its service ceaselessly. Of course, what would you expect? With something above $20 billion in the service, they’re pulling in north of $60 million in fees. That pays for a lot of country club dues for Vanguard’s executive class on top of the salaries for its advisers. I’m hoping, however, that Vanguard will take some of that money and spend it on their robos rather than sending it to the C-suite, because if my experi- ence with just one of their services, the Vanguard Portfolio Analytics Tool, is any indication, the computers run- ning the show over there are in need of some serious human intervention. (And those salaried advisers Vanguard has hired to help you aren’t the ones to do it, because they’re liable to get their hands slapped, or much worse, if they take a position that doesn’t mesh with Vanguard’s.) Here’s my story, which started out very innocently as an exercise in com- paring my Growth Model Portfolio to one of Vanguard’s “core” ETF port- folios. To be clear, I wasn’t using the Personal Advisor Services , but rather, a tool Vanguard offers on its website. You may not know it, but Vanguard offers up model portfolios made up of ETFs in 11 different allocations rang- ing from 100% stocks to 100% fixed income, with incremental changes of

The Seven Questions VANGUARD ALSO OFFERS a simple, “7-question tool” that they say will give you a “custom invest- ment plan.” I tried that one as well. As an aggressive investor with a long time horizon, I was eager to see how they’d allocate me, given that they say, up front, that the only funds they recommend are Total Stock Market Index , Total International Stock Index , Total Bond Market Index , Total International Bond Index , the STAR LifeStrategy funds and Prime Money Market . Surprise: My recommended plan (remember, this is a custom plan) was to allocate 60% of my money to Total Stock Market Index and 40% to Total International Stock Index. Let’s just say I didn’t click on the “Invest Now” button.

12 • Fund Family Shareholder Association

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