Royal Bank of Canada (RY.TO) isn’t buying completely into the robot uprising — at least not yet.
While the lender’s own robo-advisory platform, RBC InvestEase, has been in place since November, such automated online investing tools have proven to have limited appeal so far, according to wealth-management head Doug Guzman. The reason, he said, is that only a small portion of the population is comfortable with the idea.
“We have built InvestEase and it looks and acts like the best robos out there,” Guzman said in an interview Wednesday at the bank’s Toronto headquarters. “We haven’t seen Canadians run to it,” he said of the robo-advisory industry.
Robo-advisers emerged in the U.S. about a decade ago with startups such as Betterment LLC and Wealthfront Corp. threatening to challenge banks and upend the investment industry. The technology spread to Canada in 2014 with the emergence of Wealthsimple and other firms before larger rivals unveiled their own offerings, with Bank of Montreal becoming the first of the nation’s big banks to offer a product in January 2016.
“The Betterments of the world in the U.S., the Wealthsimples in Canada have proven that maybe it’s not as big a proportion of humanity as we once thought,” Guzman said, adding that robo-advisers have spent a lot of money and time trying to attract retail clients. “They need to get to scale to make it work.”
Still, within five years, Wealthsimple has attracted 150,000 customers in Canada, the U.S. and U.K., and now manages more than C$4.5 billion ($3.4 billion). Royal Bank doesn’t disclose how much InvestEase oversees. Guzman compared predictions about the success of robo-advisory startups to the emergence of direct investing in the late 1990s, “when people said that Ameritrade and similar were going to take down the entire wealth business.”
Parents can use ETFs to help their kids by Investing in RESPs
Parents, here’s a task to add to your back to school to-do list: Check the registered education savings plan you set up for your children’s college or university costs to see whether you have the right mix of investments.
As the father of two twentysomething university grads, I’m an RESP veteran. One of the lessons I learned is that running an RESP portfolio is like managing a registered retirement savings plan, but sped up. You might have a span of 30 to 40 years over which you have to adjust the mix of investments in an RRSP. You have roughly half that much time with an RESP, if we assume a child starts a postsecondary education at age 18.
What investments to use? I had a mix of ETFs and GICs for the most part. A query from a reader with a six-year-old daughter reminded me how there’s an even simpler solution available today. “I wonder what stocks, mutual funds, guaranteed investment certificates or a basket of these to buy and hold for the next 11 years for her,” this reader asked. My suggestion: Use a balanced exchange-traded fund, a deservedly hot new product that gives you a fully diversified portfolio in a single package you buy through an online broker.
The big names in balanced ETFs are Bank of Montreal, BlackRock’s iShares lineup, Horizons and Vanguard. Each offers a range of funds with different mixes of stocks and bonds. For RESPs, you could go with a balanced ETF that is all or mostly stocks at the beginning, shift into a more balanced fund at the start of high school and then lock down the money into a GIC ladder or an investment savings account in the final year of high school (or earlier if you’re so inclined).
With a six-year-old, this reader still has time to go with an aggressive balanced ETF. Examples include the Vanguard Growth ETF Portfolio (VGRO), the BMO Growth ETF (ZGRO) and the iShares Core Growth ETF Portfolio (XGRO), all with a rough weighting of 80 per cent in stocks and 20 per cent in bonds. Expect fees in the range of between 0.2 per cent and 0.25 per cent, which is quite low.
Each of these ETF companies offers more conservative options this dad could look at when his daughter attends high school. For example, the Vanguard Balanced ETF (VBAL) has a 60-40 mix of stocks and bonds, while the conservative version of this lineup – the Vanguard Conservative ETF Portfolio (VCNS) – reverses that with a 40-60 mix of stocks and bonds.
Check your child’s RESP and see how it stacks up against the simplicity and cheap fees of a balanced ETF. I wish I had them when I was managing an RESP.
How to Invest if recession is coming
Business investment and consumer confidence are taking a hit due to the growing economic jitters and uncertainty over the ongoing trade war with China. An important bond market recession warning – known as an inverted yield curve – is spooking investors. And policymakers are actively taking steps to bolster the economy, such as the Federal Reserve’s recent decision to lower short-term borrowing costs. The Trump administration is even mulling a payroll tax cut to avert a downturn.
A question I’m often asked as a finance professor and a CFA charterholder is what should people do with their money when the economy is slowing or in a recession, which typically causes riskier assets like stocks to decline. Fear causes many people to run for the hills.
But the short answer, for most investors, is the exact opposite: Stick to your long-term plan and ignore day-to-day market fluctuations, however frightening they may be. Don’t take my word for it. The tried and true approach of passive investing is backed up by a lot of evidence.
Most of us have money at risk
While we usually associate investing with hotshot Wall Street investors and hedge funds, the truth is most of us have a stake in financial markets and their ups and downs. About half of American families own stocks either directly or through institutional investment vehicles like mutual funds.
Most of the invested wealth average Americans hold is managed by professional investors who look after it for us. But the continued growth of defined contribution plans like 401(k)s – which require people to make choices about where to put their money – means their financial security increasingly depends on their own investment decisions.
Unfortunately, most people are not good investors. Individual investors who trade stocks underperform the market – and passive investors – by a wide margin. The more they trade, the worse they do.
One reason is because the pain of losses is about twice as strong as the pleasure of gains, which leads people to act in counterproductive ways. When faced with a threatening situation, our instinctive response is often to run or fight. But, like trying to outrun a bear, exiting the market after suffering losses is not a good idea. It often results in selling at low prices and buying higher later, once the market stress eases.
The good news is you don’t need a Ph.D. in finance to achieve your investment goals. All you need to do is follow some simple guidelines, backed by evidence and hard-earned market wisdom.
First of all, don’t make any rash moves because of the growing chatter about recession or any wild gyrations on Wall Street.
If you have a solid investment plan in place, stick to it and ignore the noise. For everyone else, it’s worth going through the following checklist to help ensure you’re ready for any storm on the horizon.
- Define clear, measurable and achievable investment goals. For example, your goal might be to retire in 20 years at your current standard of living for the rest of your life. Without clear goals, people often approach the path to getting there piecemeal and end up with a motley collection of investments that don’t serve their actual needs. As baseball legend Yogi Berra once said, “If you don’t know where you are going, you’ll end up someplace else.”
- Assess how much risk you can take on. This will depend on your investment horizon, job security and attitude toward risk. A good rule of thumb is if you’re nearing retirement, you should have a smaller share of risky assets in your portfolio. If you just entered the job market as a 20-something, you can take on more risk because you have time to recover from market downturns.
- Diversify your portfolio. In general, riskier assets like stocks compensate for that risk by offering higher expected returns. At the same time, safer assets such as bonds tend to go up when things are bad, but offer much lower gains. If you invest a big part of your savings in a single stock, however, you are not being compensated for the risk that the company will go bust. To eliminate these uncompensated risks, diversify your portfolio to include a wide range of asset classes, such as foreign stocks and bonds, and you’ll be in a better position to endure a downturn.
- Don’t try to pick individual stocks, identify the best-performing actively managed funds or time the market. Instead, stick to a diversified portfolio of passively managed stock and bond funds. Funds that have done well in the recent past may not continue to do so in the future.
- Look for low fees. Future returns are uncertain, but investment costs will certainly take a bite out of your portfolio. To keep costs down, invest in index funds whenever possible. These funds track broad market indices like the Standard & Poor’s 500 and tend to have very low fees yet produce higher returns than the majority of actively managed funds.
- Continue to make regular contributions to your investments, even during a recession. Try to set aside as much as you can afford. Many employers even match all or some of your personal retirement contributions. Unfortunately, most Americans are not saving enough for retirement. One in 4 Americans enrolled in employer-sponsored defined contribution plans does not save enough to get the employer’s full match. That’s like letting your employer keep part of your salary.
- There’s one exception to my advice about standing pat. Let’s suppose your long-term plan calls for a portfolio with 50% in U.S. stocks, 25% in international stocks and 25% in bonds. After U.S. stocks have a good run, their weight in the portfolio may increase a lot. This changes the risk of your portfolio. So about once a year, rebalance your portfolio to match your long-term allocation targets. Doing so can make a big difference in performance.
Always keep in mind your overall investment plan and focus on the long-term goals of your portfolio. Many market declines that were scary in real time look like small blips on a long-term chart.
In the long run, this approach is likely to produce better results than trying to beat the market – which even pros tend to have a hard time doing.
Billionaire investor Warren Buffett demonstrated this by easily winning a bet that a simple S&P 500 index fund could beat a portfolio of hedge funds – supposedly the savviest investors out there, at least judging by the high fees they charge.
In the words of legendary investor Benjamin Graham: “The investor’s chief problem and even his worst enemy is likely to be himself.” Graham, who mentored Buffett, meant that instead of making rational decisions, many investors let their emotions run wild. They buy and sell when their gut – rather than their head – tells them to.
Trying to outsmart the market is akin to gambling and it doesn’t work any better than playing a lottery. Passive investing is admittedly boring but is a much better bet long-term.
But if you follow these guidelines and fasten your seatbelt, you’ll be able to ride out the current turbulence.
Investors pull $2.9bn from Invest in China
Investors pulled $2.9bn from funds that invest in China stock market in the month ending last Wednesday, as concerns over economic growth and tariffs weighed on Chinese shares.
The outflows from mutual funds and exchange traded funds that invest in China’s A-shares market were the sharpest since the start of 2017. Investors have now pulled $5.9bn from the funds since the start of the year, according to EPFR Global data.
The spectre of fresh tariffs on Chinese goods, underwhelming economic data and a weaker renminbi have pressured Chinese stocks and compounded concerns about a global slowdown, triggering a rush to safe assets like US government bonds.
“Markets have had a panic attack in August,” said Michael Kelly, global head of multi-asset for PineBridge Investments. “There is a confluence of uncertainty and it’s rattling all markets and you can see it’s impacting the China A-shares market, which has led to outflows.”
Growth in Chinese industrial output slowed to the lowest pace in 17 years according to July data released last week from China’s National Bureau of Statistics. The renminbi also weakened, falling through a key threshold of Rmb7 to the US dollar.
Meanwhile, trade tensions between the US and China intensified. Earlier this month, President Donald Trump announced that a new 10 per cent levy on $300bn of Chinese goods would take effect in September before delaying the tariff.
The outflows from China stock funds do not capture recent selling from emerging markets funds, many of which have a heavy weighting to China. In March, MSCI, the index provider, included Chinese stocks in its popular emerging markets benchmark, which is followed by about $1.9tn in assets.
BlackRock’s iShares Core MSCI Emerging Markets ETF, which is the largest fund of its type that tracks the popular index and represents $52.4bn in assets, has shed $2.6bn in assets over the past four weeks, according to Bloomberg data.
“Outflows from Chinese stocks are definitely on our radar,” said Dave Chapman, head of multi-asset portfolio management for Legal & General Investment Management America. “The depreciating currency, capital controls, the effects on profitability of Chinese companies — these issues are interrelated and can be a true tail risk.”
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