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Robo-advisors were put to the test these last six months. As the pandemic spread and hurt the economy, the stock market fell quickly and robo-advisors had to bear the heavy burden of re-allocating portfolios, not to mention trying to stay afloat.
In fact, robo-advisors saw more cash coming in and out than they’ve ever seen before.
They’ve also seen an incredible increase in new sign-ups. Since robo-advisors are fairly new since the last economic crisis of 2008, it’s interesting to see how they’ve performed.
3 Reasons why Robo-Advisors did so well
Experts don’t agree on the reasons, but some of the consensus includes:
1. Most Robo-Advisors use goal-based investing.
They take into consideration an investor’s risk tolerance, timeline, and intended financial goals. As an investor nears his goal, robo-advisors naturally choose conservative investments to reduce the risk of loss.
More conservative investments mean a lower risk of loss even during an economic downturn. While there’s a healthy mix of investors close to their goals and those not so close, robo-advisors found a way to ride the storm, helping investors through it.
2. Robo-Advisors offer allocation shifts
Many investors immediately pull out of the market when investments go south. It makes sense why they would do it, but it’s the worst thing they could do. Investors using a robo-advisor are less likely to do so because of the automated re-allocation.
If anything, robo-advisors reallocated to less risky investments for the time being, such as bond ETFs and then switched investors back to stock ETFs once the market rebounded. Investors staying in the market, but reallocating temporarily played a role in robo-advisors’ success.
3. Frequent Communication
If there’s one thing all investors needed during the pandemic it’s communication. That can be hard with a robo-advisor since most communication is digital, but many advisors offer alternatives including live chat, email, support, and even phone support.
What did Robo-Advisors Do?
Robo-advisors typically buy-and-hold. One of the main benefits of using one is the limited emotional investing you can do. When you do DIY investing, it’s human nature to pull out of the market when it takes a nosedive like it did in February/March of this year.
Robo-advisors don’t encourage that and actually make it hard to pull out for that very reason. Most robos use long-term passive investment strategies, which meant most portfolios were left alone, or if they were affected, have since bounced back.
Which Robo-Advisors did Good?
As you probably guessed, some robo-advisors did good while others had a rougher time through the pandemic, but most remained open.
TD Ameritrade’s Essential Portfolios, for example, was able to get most of the market’s upswing rather than downswing. They have a large focus on fixed-income securities which didn’t see the same downfall as equities, so that helped offset the risk.
Charles Schwab Intelligent Portfolios, on the other hand, had the opposite issue. They were on the market’s downside. This is because Schwab Intelligent Portfolios focus heavily on international emerging markets, which are much riskier than fixed-income assets.
Many robos focused heavily on tax-loss harvesting throughout this time, and Betterment advisors stated most phone calls and inquiries they received were about this issue. Investors wanted to know how to offset their tax liabilities during such a volatile time.
Does this mean rebalancing trades won’t happen?
They will, it may just take time. Most robo-advisors didn’t buy into the ‘sell now’ phenomenon and rather are waiting to see what happens.
During a downturn, most investors sell equities and buy fixed-income assets for the stability and lower risk of loss. The trading volume wasn’t nearly as high as one would think during the pandemic, though.
The most important thing robo-advisors did, whether human or computer, was to avoid emotional investing. Even reallocating portfolios wasn’t necessary at this point, but it may become apparent down the road.
How Could Robo-Advisors do Better?
Robo-advisors did a great job getting through the worst of the pandemic, but moving forward, many firms may implement more support to help investors during times of crisis, such as the pandemic.
Offering more life-planning services may help investors feel better prepared and less likely to pull out of the equities market. Helping clients realize the importance of emergency funds and how to cut expenses is crucial. While it may seem simple to jump right into your portfolio and cash out your investments, it’s the worst decision long-term.
The right robo-advisor will help you see through the hard times. Even if you have to reallocate your portfolio, it’s better than selling your investments and realizing a serious loss, not to mention tax liabilities.
Set yourself up for the future by choosing the robo-advisor that aligns with your beliefs and who will help you through the pandemic should it or something similar occur again.
Use the following Quiz and find out which robo advisor is best for you.
If you have any questions, please comment below.
Michael is a senior writer at The Robo Investor. He earned his master’s at the Craig Newmark School of Journalism at CUNY, and is currently taking CFP courses at the University of Scranton. He has been an avid finance enthusiast ever since he started investing at the age of 23. Meet the Team