This past week I have been running a series of posts asking prominent independent bloggers their thoughts on a number of topics. I hope you got something extra out these posts because despite their appearance they do require a bit of work to put them together. Since turnabout is fair play you can find my answers to the blogger questions below.
1. The so-called robo-advisors, i.e. Wealthfront, Betterment, etc., have garnered a lot of hype (and VC money) in their pursuit of automated investment solutions. Will these firms become the new Charles Schwabs of the world or will automated portfolios simply be the way all advisors manage client accounts?
My sense is that algorithmic solutions will be the way most investors have their money managed in the future. The economics of software-based solutions is simply too powerful to dismiss. I agree with Michael Kitces that the inevitable conclusion is that individuals will have their equity portfolios managed at the single security level, bypassing ETFs and index funds along the way.
2. 2014 seems to be the year of ‘smart beta’ ETFs Is this simply a bull market phenomenon? Are smart beta ETFs taking the air out of the actively managed ETF space? Are they worth the effort for the majority of investors?
There is nothing inherently wrong with the idea of ‘smart beta’ ETFs. There are certain factors that investors would do well, over the long run, to tilt their portfolios toward. However as the trend plays out more and more funds will get launched with little or no backing beyond that of the marketing department. Investors will get sucked into hot trends that they will inevitably abandon as they underperform. The biggest effect smart beta ETFs may have is displacing demand for actively managed ETFs, especially on the equity side. Why pay active management fees when a rules-based ETF can get the job done at a lower cost?
3. Uber just raised VC monies at a $17 billion valuation. Are the private markets the new public markets? Is the average investor missing out on his/her inability to meaningfully participate in the private/pre-public stages?
Probably. For any number of reasons private companies are trying to say private as long as they can. While many strides have been made in opening up the world of crowdfunding and angel investors there is still a long way to go. Even in those cases where accredited investors can get into angel investments they are coming with at a cost.
4. Rob Arnott has made a lot of noise about the role of demographics on asset returns. Given that the demographic outlook for much of the developed world is pretty bleak (and relatively predictable) should we be worried?
There are a number of reasons to believe that going forward expected returns will be lower than historical averages. Demographics is simply another reason for this to be the case. I would agree many of the other bloggers that you can’t look at any country’s demographics in isolation. In a more globalized world there are any number of demographic trends all going on at once.
In my book I wrote “savings is the best investment.” If individuals can consistently live below their means and funnel savings into a reasonably diversified portfolio over time there is not that much more than can do. The problem is that investors who get started late make the mistake of trying to make up for lost time by trying to maximize their investment returns. It goes without saying that often leads to unforced errors.
I just finished reading Michael Lewis’ Flash Boys. I enjoyed the behind the scenes story of the launch of IEX. I would recommend anyone interested in the subject of high frequency trading check out Scott Patterson’s Dark Pools which provides a more comprehensive history of how it is we got here. I also started reading William Bernstein’s Rational Expectations: Asset Allocation for Investing Adults which is an updated and more technical look at the challenge of asset allocation today.
On the blog front I am impressed with what Ben Carlson, A Wealth of Common Senseand Patrick O’Shaughnessy at Millenial Invest have been doing great work in the relatively short time they have been blogging.
I hope our readers recognize that thoughtful answers to the above questions take time. So please give the respective bloggers a shout when you get a chance.