Anti-Asimov’s Three Laws of Robo-Advisory

  1. Falsely affirm that nobody can beat the market
  2. Substitute the idea of wealth maximization with the idea of cutting-off the management fees.
  3. Don't disclose anything about the underling portfolio optimization model and avoid showing possible future portfolio dynamics.

Our comments:

  1. Indeed, at best only 5% of portfolio managers can beat the market. But there is nothing special, there are about 5% of the best students, doctors, lawyers and so on. You will spend your time in choosing the best doctor or lawyer, won't you? Why not to invest some time in a proper selection of the wealth manager? We recommend to start with reading this and this posts.
  2. Saving management fees is generally a good idea. But don't forget that a good work must be well-paid, and there is nothing wrong if a portfolio manager charges high fees, as long as you net return on investment is still (much) better than by buy&hold. Additionally, the robo-advisors are not too cheap for what they do. Actually, they just calculate your static "optimal" portfolio in an intransparent way. Very few of them even offer rebalancing (dynamic portfolio restructuring conditioned on the market evolution). Thus think about alternatives like a fee-free broker
  3. Sorry, guys, but among specialists it is a well-known fact that the Markowitz model does not work. It is just too sensitive to the market parameters estimation errors. Black-Litterman might do better but generally it doesn't. The assumptions are too restrictive: the asset returns should be jointly normal (otherwise the nice theory of Bayesian conjugates is invalid) and the interdependence of assets should not change in time (thus there are no ways to change turn-arounds like shale oil).
    By the way, have a look at possible future scenarios of the "optimal" Vanguard portfolios.
Like this post and wanna learn more? Have a look at Knowledge rather than Hope: A Book for Retail Investors and Mathematical Finance Students

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