Robo Investment Advisors are a Scam

Should you trust your hard-earned retirement portfolio to a robot? 

The math doesn’t lie. The answer is a resounding NO.

All automated investment services, or ‘robo-advisors’, have the same value proposition. They are easy, low-maintenance, automated investment advisors. They use algorithms to set a predetermined proportion of your portfolio in basic index exchange-traded funds after a series of questions to determine customers’ risk tolerance. The algorithm then recommends a diversified portfolio and does this automatically. If you contribute $10,000, it will allocate X% to US stocks, Y% in foreign stocks, and Z% into emerging markets, and so on. 

To give an example based on my own risk tolerance, this is what my portfolio would look like on Wealthfront. 

These services have quickly amassed billions of dollars in assets under management (AUM) from young professionals. Wealthfront reached $20 billion AUM as of September 2009, Betterment had $16.4 million as of April 2019. They market their platforms on Nobel Prize winning research to build their models. In reality, they just tell investors to buy simple index funds. 

Before diving into some research, I actually think the idea is brilliant. Investors contribute, the platform takes care of the rest for a small annual advisory fee of 0.25%. For this fee, the platform promises to lower your taxes, using strategies like “tax-loss harvesting”, and to manage your risk. On top of these annual fees, investors need to pay the individual index fund expense ratios that invest into their portfolio. This model is a great deal for companies like Wealthfront. They attract young, ignorant professionals early and invest their money for the rest of their lives, skimming larger and larger fees from their accounts as their wealth grows.

The dirty little secret is most investors do not have a grasp of compound interest. They certainly do not understand how compound fees work.

If a 25-year old invests $100,000 of retirement funds with Wealthfront, they will likely pay the company over $100,000 in fees by their 66th birthday.

If they invest additional money from their salary over that time, the fees will grow even higher. 

You might say, “I don’t want to invest myself. I would rather have someone do it for me.” I can’t fault you for wanting to pay for convenience. I have good news for you. Vanguard has what’s known as Target Retirement Funds. These are automated investment vehicles that rebalance overtime, adjusting for risk as you grow older based on your intended retirement date. In my case, the Vanguard Target Retirement 2055 Fund is what I would choose.

This is basically Wealthfront without a 0.25% fee charged on top of your account. You will not be able to avoid fees entirely, but in Vanguard’s case – they are quite small.

I’ve built a simple model to show the differences in portfolio values and costs if you invest without fees, if you invest in a simple low-cost option with Vanguard, or with a robo-advisor service. As you will see, the cost of using a robo-advising service like Wealthfront and paying 0.25% over time adds up significantly. How significantly? Spoiler alert: it’s a lot. 

Let’s take a look at some examples. 

In the first scenario, let’s assume a $10,000 initial investment, a $5,000 annual contribution, and a 7% investment return. 10 years after starting the investment, the fees are not that large. These fees start to compound and get much larger later down the road. By the time you reach retirement age and are ready to use these funds, you will find out that the robo-advisors have taken over $100,000 of your investments over the years through the 0.25% they charge.

How is that possible? Every time you pay the 0.25% fee to the robo-advisor, that money is no longer yours to invest and grow at a compounded rate. It might not seem like a lot at first, but it’s significant over a 40 year investment career. 

If you’re an aggressive saver and a successful investor, the magnitude of these fees will be even worse. Our second example will assume the same $10,000 initial investment, but this time the annual contribution will increase to $15,000 and the investment return will be 8%. By the time you reach retirement age, the robo-advisor will take over $350,000 from your account.

Are robo-advisors a scam? Well, not in the Bernie Madoff sense. But I don’t see how investors do themselves any favors by investing this way. These robo-advisors do not promise to outperform the markets any more than a regular index fund. Personally, I would not invest in something knowing the long-term impact the fees will have on my wealth. As Ramit Sethi wrote in the terrific personal finance book, I Will Teach You To Be Rich:

“Most of us have been taught to ask $3 questions. We should really be asking $30,000 questions.”

Or in this case, $300,000 questions.

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Acknowledgements: Thanks to Adam, Ben, John, and Blair for their feedback on this post.

The Best of Nick Maggiulli

How often have you seen statements like this? 

I have not been investing for a very long time. I certainly have never invested through a recession. During the Global Financial Crisis, I had just graduated from college with thousands of dollars in student loan debt. By the time I finally paid those off in 2017, I thought I missed one of the greatest bull runs in history. 

Once my student loans were paid, I was able to focus more on investing over the last few years. As someone whose career is in finance, it can be easy for me to be over-confident in my personal finance decisions. Naturally, I seek out the expertise of smart people. How do they think? How do they act in challenging financial situations? How do they set themselves up to do well financially over the course of their life?

Nick Maggiulli is a data scientist and financial blogger at Of Dollars And Data. He writes about why most traditional financial advice has failed us. Nick helps investors see that investing decisions are never as easy as they seem. He sheds new light on personal financial decisions, using storytelling and data to help his audience understand these situations at a deeper level. 

Nick’s philosophy is that each investor experiences life and investing differently. We get married, have kids, lose jobs, get sick, experience loss, change careers, and the list goes on. Our lives are dynamic, and the financial decisions we make are dynamic too. In order to make wise financial decisions, we need to understand our biases, our wants, our strengths and our weaknesses. Once we understand ourselves, we will be better equipped to make smart financial and life decisions.   

I found Nick Maggiulli’s work in July 2018 and have been an avid reader ever since. At that time, he had 80 posts on his blog, which I read almost immediately to devour the financial wisdom he shared. Nick has written a blog post every week for 167 weeks in a row, allowing me to learn interesting and insightful data along the way. 

If you are interested in reading Nick’s work, here’s where you should start: 

Popular posts:

Of the 167 posts on his blog, I want to share five that have resonated with me the most: 

How to Invest a Lump Sum

If you only read a single post to understand the essence of Nick’s blog, this is it. As investors (and humans), we have the tendency to believe we can time the market. We think we have the power to increase our rates of return by using a dollar cost average strategy (DCA) instead of investing in a lump sum manner. Maggiulli includes a fascinating data visualization to show that DCA underperformance increases as the length of the buying period increases.

lump sum vs dollar cost averaging outperformance over time for varying time windows

Climbing the Wealth Ladder 

As I begin to build wealth, thinking about where and how I spend and save my money is so important. This post helped me frame financial decisions in the context of “income levels”. A good proxy to use is 0.01% of your net worth. Let’s say you are at the grocery store and you are deciding whether to purchase a dozen regular eggs for $1.99 or a dozen cage-free eggs for $2.99. If your net worth was $1,000, this single choice (paying $1 extra for cage-free eggs) could have a slight impact on your finances as it would represent 0.1% of your total assets. However, if you were worth $10,000 (or more) the decision to spend $1 more would likely be trivial to your finances since it represents less than 0.01% of your wealth.

  • Level 1. Paycheck-to-paycheck: $0-$0.99 per decision 
  • Level 2. Grocery freedom: $1-$9 per decision 
  • Level 3. Restaurant freedom: $10-$99 per decision 
  • Level 4. Travel freedom: $100-$999 per decision 
  • Level 5. House freedom: $1,000-$9,999 per decision 
  • Level 6. Philanthropic freedom: $10,000+ per decision.

The Constant Reminder

We have a seemingly endless supply of investment advice at our disposal. The truth is the decisions we make today will have compounded effects decades later. In the short run, they are almost invisible. In the long run, however, our decisions can lead to incredible results. 

“When you increase your savings rate from 5% to 10%, you don’t get 5% more money at the end, you double the amount of money you have. The first day you form your exercise habit is the day you lose the weight. The first day you form your writing habit is the day you wrote your best work. It all compounds back to the moment when the habit is formed.”

You Have No Competition

The same is true in writing online, or personal finance. We naturally get intimidated by all the competition out in the world. Investing is the study of human behavior. It’s important to remember that we are only competing against ourselves. Maggiulli’s goal is to get the reader to re-examine their behavior. Michael Jordan said it best:

“Every day, I demand more from myself than anybody else could humanly expect. I’m not competing with somebody else. I’m competing with what I’m capable of.”

Seven Things I Learned From One Year of Blogging

As with most of the posts on Of Dollars and Data, the ideas can be applied to personal finance, online writing, or life in general. In the context of writing online, this post focuses on the perseverance to continue doing the work – as hard as it may be. Successful people in life share a common trait in anything they do, they don’t give up. Hard work and luck go hand in hand to create successful outcomes. As Samual Goldwyn said:

“The harder I work, the luckier I get.”

Nick Maggiulli won’t give you all the answers when it comes to your finances. But that is not the point. He does an incredible job of framing complex financial problems into easy-to-understand, relatable stories backed up by data and facts. At the end of the day, each individual investor is responsible for their decisions. Nick’s writing has helped me frame my own financial goals, and has given me the data to confidently make those decisions.

You can subscribe to Of Dollars And Data here.

Coronavirus and Remote Work

The biggest worldwide story over the last month has been the rapid spread of the COVID-19 virus, first identified by health authorities in Wuhan, China. As I’m writing this blog post, the virus has spread to more than 70 countries, more than 90,000 cases have been confirmed, 8,000 of which have been classified as serious. 

The Coronavirus has disrupted daily life, rocked the business world, and brought the rapid climb of the global stock market to a sudden halt, turning into market correction territory quicker than at any point in history. It took just 6 days for the S&P 500 to fall 10% from its all-time high on February 20. 

As companies act to help control the spread of the virus around the world, corporate emergency plans have forced employees to work remotely. My goal is to discuss how the the scare of a global pandemic is catalysing the eventual acceptance and ubiquity of remote work.

As China’s seaports and airports are at the epicenter of global trade, one of the biggest causes of the economic slowdown has been getting goods in and out of China due to roadblocks, quarantines, and factory closings. “Due to the coronavirus outbreak, cargo volumes at U.S. ports might be down by 20 percent or more on a year-on-year basis compared to 2019,” said Cary Davis, an official with the American Association of Port Authorities.

Companies that have direct business exposure to China and its trade logistics have been the earliest to feel the effects and sound the alarms. Apple warned investors that the supply of iPhones would be affected by the spread of the virus. Apple relies heavily on production of their products in Shenzhen, China, and consumers in China make up about 20 percent of their business in terms of global revenue.

Regardless of their direct or indirect connection to China, companies around the world are taking precautionary measures to cancel any non-essential employee travel, and recommended that employees work from home, whenever possible. According to financial data platform, Sentieo, 77 public company transcripts mentioned “work from home” or “working from home” in February. This is an increase from just four mentions of the same phrase in February 2019. The vast majority of these transcripts also mentioned “Coronavirus”.

It’s hard to find definitive statistics on how many people work remotely. Gallup’s most recent survey in 2016 showed that 43% of employees worked remotely in some capacity; that was up 4 percentage points from 2012. Another survey showed remote workers make up anywhere from about 5 percent (those who typically work from home) to nearly two-thirds (who sometimes work remotely) of the workforce, depending on the measurement. What is absolutely certain is that the trend has been ticking up and a pandemic like COVID-19 has the potential to fast-track the move by making it more universally accepted and prominent. Kate Lister, president of Global Workplace Analytics said, “What these temporary uses tend to do is show companies that a) it can be done, and b) having people already accustomed to working remotely makes the transition much easier.”

Companies that help enable the transition are benefiting as a result. In fact, their share prices are actually rising as investors take notice of the benefits of remote work. Shares in Zoom, the teleconferencing software company, skyrocketed over the past week as more white-collar workers work from home and telecommunicate. Although, anecdotally, some investors mistakenly invested in shares of $ZOOM instead of $ZM, causing shares of the incorrect company to spike nearly 80% in one day.

Companies who have predominantly remote work cultures and whose businesses are not impacted by the spread of a possible global pandemic are not seeing major disruptions to their everyday activities. One company in particular that pioneered the remote work culture and benefited tremendously as a result is the project management company, Basecamp. Basecamp was founded in 1999 with 4 people. They currently have about 50 employees spread out across 32 different cities around the world. They work from home, from coffee shops, from co-working spaces, or anywhere with internet access. The co-founders of the company, Jason Fried and David Heinemeier Hansson wrote a book in 2013 called Remote: Office Not Required and have been vocal proponents of this shift.

Basecamp’s internal handbook and communication guide are publicly accessible for all those who are interested. It discusses what they believe makes them successful and able to run a business remotely that has been cash-flow positive since the very beginning. Basecamp was early to the idea that remote work increases the talent pool, reduces turnover, lessens the real estate footprint, and improves the ability to conduct business across multiple time zones, to name just a few advantages. 

Fred Wilson, investor of USV, recently published a blog post detailing his “zoom room”. Wilson said that he converted his office a year and a half ago to only have a couch, a chair, and displays for video conferencing. He describes how meetings now primarily occur through Zoom; therefore eliminating the need for a traditional desk and chair in his office.

As we think about the future of remote work, and whether this latest catalyst will have lasting effects on how business is conducted around the world, one has to wonder which businesses and industries will be able to take long-lasting advantage of such changes. In a survey of 11,000 workers and 6,500 business leaders by Harvard Business School and Boston Consulting Group, the vast majority said that among the new developments most urgently affecting their businesses were employees’ expectations for flexible, autonomous work; better work-life balance; and remote working. (Just 30 percent, though, said their businesses were prepared.) 

Technology is a big reason for the change. Nowhere is that more true than today where millions of workers and thousands of companies have already discovered the benefits of working remotely. In companies of all sizes, representing virtually every industry, remote work has seen steady growth year after year. The youngest people entering the workforce today don’t remember a time when people weren’t always reachable, so they don’t see why they would need to sit in an office to work. The average yearly cost to rent office space in Chicago, where I live, is about $7,000 per worker, per year. I’m not even talking about more expensive cities such as New York, San Francisco, or Washington, D.C.  With such exorbitant costs, the eventual push towards remote work almost seems inevitable. 

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The Definitive Answer to “Where are you from?”

This may sound like an easy question to most of you, but when you grew up in four countries and seven cities before the age of 12, it can be somewhat tricky to unpack. Let me explain:

I was born in St. Petersburg, Russia in October 1988. My parents had plans to move to the United States shortly thereafter, but the U.S. changed policies in 1989 that closed the temporary processing of visas for Soviet Jews. Along with thousands of other families, this forced my parents to start an immigration process which would eventually lead them to the United States, but not before a lengthy detour. In 1992, they moved to Israel when I was 4 years old, and in 1996, they moved to Canada when I was 7. In Canada, the first two years were spent in Montreal, followed by two years in Toronto, and finally a year in Ottawa. 

Finally, in the summer of 2000 while visiting some family friends during the summer, my mom had an interview and received a job offer from a company in Chicago, allowing my parents to make the move they intended to make for so many years. 

I have now lived in Chicago or in the surrounding suburbs for the majority of my life. I finished high school and college in the Chicago area. In 2012, I started the application process to become a naturalized U.S. citizen. I was able to vote in the 2012 election for the first time, which was very interesting, rewarding, and educational. For the first time in my life, I felt like this is where I belonged. Chicago was home. When I think about it, it’s the sense of familiarity, belonging, and stability that cemented Chicago and the U.S. generally as home to me. I still have my Israeli and Canadian citizenships, and although I do not plan on moving back to either country, I do plan on keeping all three citizenships active for the foreseeable future. 

Over the years, I have listened to my parents retell their immigration story, and to this day, it’s still difficult for me to comprehend everything they went through. I’m honestly not sure that I could have handled the stress and uncertainty of the entire process. Close your eyes for a minute. Imagine landing in a new place, no place to stay, no money in your checking or savings account, no idea where your family’s next meal would come from. My memory of that time is hazy at best, I was just 7 years old, afterall. But for my parents, this is something they recall and think about each and every day. 

I vividly remember my first day in a French-speaking school in Montreal, it was horrible. I didn’t know the language, had no one to talk to, and could not begin to comprehend what the teacher was asking me. I came home that day crying. Slowly, I started making friends. I started being able to communicate and learn a new language and life in a new country started to feel normal. But as soon as I became more comfortable overcoming those initial barriers of conversation and friendship, it felt as if we had to move again. 

When I was younger, I was always confused why we didn’t stay in one place for more than two years. Switching schools and making new friends was constantly difficult and frustrating. Looking back, this was ultimately helpful in shaping my ability to approach new people, and get along with just about anyone I meet. Having exposure to different people and cultures gives you perspective on people you might not naturally see. I firmly believe this is why I am able to empathize and see the good in people in nearly all situations. 

Now as an adult, I am finally able to grasp and understand the sacrifices my parents had to make in order to reach their goal in moving and giving their family a chance to have a better life in the United States. In speaking with them, I know they have given up the ability to grow their family beyond just having one child, progress in their own careers, overcome language and cultural barriers, not to mention the financial sacrifices in starting life over in a new and unfamiliar place. It’s easy to take growing up in one place your entire life for granted. I now feel like I have a much more meaningful connection to the country in which I was able to grow up, get an education, and start my career. It’s hard to say how life would have turned out had I not gone through this process throughout my childhood, but I’m incredibly glad to have experienced it. You don’t realize how this manifests for a child until they grow up and become an independent thinker able to make their own decisions. I think it’s no accident that I pursued a career in finance, it’s no accident that I am uber conscious of budgeting and money management in general. And it’s no accident that I am a little nerdy when it comes to saving early in life. My parents’ experiences instilled a core belief in me that I should be a diligent saver and investor to make sure that I set myself up well for the future.

Getting Back into Blogging

Recently, I have noticed more and more that the smartest people I follow on Twitter and on the internet have been blogging and sharing their writing. Writing is something that I never thought would be so important to someone who works in the finance but I’m starting to learn that being a good writer is important in every industry.

I started my personal blog in 2013 on Blogger and migrated that over to Tumblr and was committed to posting for a short while. As Tumblr faded as a blogging platform, so did my writing on it. I decided to migrate my Tumblr blog over to WordPress and start fresh.

This is hopefully the first of many posts that I am planning to publish, and although my current audience is a total of zero people, I really want to dedicate the time to become a better writer and post regularly about topics that I find interesting and those that make me want to keep learning. That will require reading a lot and taking good notes, something that actually makes me very excited.

How to Get More Out of Snapchat

There is one common denominator I see that people struggle with when they use social networks like Twitter, Instagram, Tumblr, and most recently Snapchat. 

This made a lot more sense for me when I read Fred Wilson’s No Pain No Gain and Jeffrey Kalmikoff’s You’re Using Instagram Wrong posts. What typically happens for users is their feeds lose value and they churn out of these highly powerful services quickly. What are they doing wrong? In many cases, they are following only their friends instead of following their interests. 

The reason why I love and use Twitter and Instagram, and now Snapchat so much is because I took the time to carefully curate those feeds with users who are not necessarily my friends, but interesting people who share thoughts, photos, and stories that fit my interest profile.

In my short time using Snapchat, I’ve encountered people who get random pictures sent by friends, but their Story feed is empty. In my case, the Story feed has anywhere from 10-40 posts at any given time, and the feed instantly becomes as interesting as Twitter and Instagram because I’ve taken the time to follow accounts that use the medium creatively and correctly. 

My friend David Perell asked me to share that list, so I will here. Keep in mind these are the accounts that make the feed interesting for me. Snapchat’s Discovery features are pretty horrible right now, but like Fred Wilson said in his post, “When it comes to social media, no pain means no gain.” Take the time to find users you like, and your feed will be just as enjoyable for you.

Are there any users you like that I missed? Tweet me @levnaginsky with some recommendations 

Golf Among Millennials is Dying?

I’ve read countless articles (here, here, and here to list a few) over the last few weeks that golf among people my age group (18-30; or the so-called “Millennials”) is dying in the United States.

I seem to be a huge outlier in this statistic, because I’ve never played more golf in my life than I have this summer. If you check my Foursquare history, I’m approaching 30 rounds. 

I imagine the reason is that younger people today don’t want to spend 4+ hours without being somehow connected to the Internet. In reality, golf has always been the most therapeutic part of the weekend for me – a place that I can go, turn off my phone for that time and simply enjoy the outdoors and the company of my playing partners.  

I’m interested to hear what others are seeing around their home courses.