Roboadvisor vs. S&P500 Index Fund

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beebee5004
Posts: 11
Joined: Fri Feb 22, 2019 6:24 pm

Roboadvisor vs. S&P500 Index Fund

Post by beebee5004 »

I am looking at the performance of a roboadvisor in comparison to the S&P500 index since Jan 2019. The S&P500 has outperformed the roboadvisor by around 18% since then, and the roboadvisor's diverse portfolio appears to have exhibited as much volatility as the S&P500 index during the market downturn this year. Is this a good reason to consider moving all money from the roboadvisor to an S&P500 index? I understand that, in theory, the market trends in the future may result in the roboadvisor outperforming the S&P500, or having more stability than the S&P500. I guess my question is whether, in practice, this seems at all likely for the foreseeable future.
muffins14
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Joined: Wed Oct 26, 2016 4:14 am

Re: Roboadvisor vs. S&P500 Index Fund

Post by muffins14 »

I think that this (past performance) is not a good reason to move away from the robo-advisor, but there are many other very good reasons to do so, such as:

Costs
Potential to end up with many undesired investments because you don't control the portfolio
Costs
123
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Joined: Fri Oct 12, 2012 3:55 pm

Re: Roboadvisor vs. S&P500 Index Fund

Post by 123 »

What asset allocation or investing goal was the roboadvisor trying to maintain/achieve? Eighteen months is hardly an adequate enough period to evaluate any investment strategy. However if the "investment strategy" was just to "make money" then you're just going to get random error anyway.
The closest helping hand is at the end of your own arm.
H-Town
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Re: Roboadvisor vs. S&P500 Index Fund

Post by H-Town »

beebee5004 wrote: Fri Jul 31, 2020 4:53 pm I am looking at the performance of a roboadvisor in comparison to the S&P500 index since Jan 2019. The S&P500 has outperformed the roboadvisor by around 18% since then, and the roboadvisor's diverse portfolio appears to have exhibited as much volatility as the S&P500 index during the market downturn this year. Is this a good reason to consider moving all money from the roboadvisor to an S&P500 index? I understand that, in theory, the market trends in the future may result in the roboadvisor outperforming the S&P500, or having more stability than the S&P500. I guess my question is whether, in practice, this seems at all likely for the foreseeable future.
You need to compare apple to apple. Roboadvisor used a mixture of ETF and/or stocks/bonds. It also charges you a flat fee, i.e. 0.25% by Betterment. If all else equal, you will always underperform the "market" by 0.25% a year.
rgs92
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Re: Roboadvisor vs. S&P500 Index Fund

Post by rgs92 »

I would not think any reasonable evaluation of performance could be based on a time period of a year and a half. There is always a list of broad-based mutual funds that perform better than index funds for limited periods of time, even multiyear or decade-long periods. But beyond that, this is not the case. This is one of the main findings upon which Bogleheads is based.
GmanJeff
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Re: Roboadvisor vs. S&P500 Index Fund

Post by GmanJeff »

Topic Author
beebee5004
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Joined: Fri Feb 22, 2019 6:24 pm

Re: Roboadvisor vs. S&P500 Index Fund

Post by beebee5004 »

GmanJeff wrote: Sat Aug 01, 2020 6:53 am Subscribe to this and read it: https://www.backendbenchmarking.com/the-robo-report/
Thank you for the referral. I subscribed and so far have found the report very informative.
GmanJeff
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Re: Roboadvisor vs. S&P500 Index Fund

Post by GmanJeff »

beebee5004 wrote: Mon Aug 10, 2020 9:43 pm
GmanJeff wrote: Sat Aug 01, 2020 6:53 am Subscribe to this and read it: https://www.backendbenchmarking.com/the-robo-report/
Thank you for the referral. I subscribed and so far have found the report very informative.
You're welcome!
whereskyle
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Re: Roboadvisor vs. S&P500 Index Fund

Post by whereskyle »

beebee5004 wrote: Fri Jul 31, 2020 4:53 pm I am looking at the performance of a roboadvisor in comparison to the S&P500 index since Jan 2019. The S&P500 has outperformed the roboadvisor by around 18% since then, and the roboadvisor's diverse portfolio appears to have exhibited as much volatility as the S&P500 index during the market downturn this year. Is this a good reason to consider moving all money from the roboadvisor to an S&P500 index? I understand that, in theory, the market trends in the future may result in the roboadvisor outperforming the S&P500, or having more stability than the S&P500. I guess my question is whether, in practice, this seems at all likely for the foreseeable future.
Past performance is not everything. Look under the hood, see what you are invested in, and determine if that portfolio is one you believe in. I started with Betterment, and I am forever grateful because Jon Stein the CEO is open about the outsized influence of Jack Bogle. Most of the Betterment portfolio follows Bogleheaded principles, but the tilt toward value stocks, fixed ex-us allocation, and .25% fee on top of the expense ratios turned me off once I read a few books and visited this website. It was not hard to figure out that I could do everything Betterment does for less than 1/3 of the cost. (One reason to stick with these robo-advisors perhaps, at least in a taxable account, is the Tax Loss Harvesting they do automatically. But, once again, Bogleheads TLH all the time.) Once I decided I wanted to hold a smaller ex-us allocation and did not want to tilt towards value stocks, ditching the roboadvisor was the right choice.

However, you should consider whether your robo-advisor's portfolio took less risk than an SP 500 portfolio took over this period of underperformance. A 100% SP 500 portfolio is generally considered fairly risky as it holds no fixed income. If, however, you do think you'd simply like to hold an SP 500 index fund, I am positive you can do that for a small fraction of the cost of a robo-advisor. Or you can do a classic two-fund and just hold the sp 500 and the total bond market at Vanguard in your desired weights. That will cost you virtually nothing, especially compared to a robo-advisor.

Good luck!
"I am better off than he is – for he knows nothing and thinks that he knows. I neither know nor think that I know." - Socrates. "Nobody knows nothing." - Jack Bogle
dbr
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Re: Roboadvisor vs. S&P500 Index Fund

Post by dbr »

beebee5004 wrote: Fri Jul 31, 2020 4:53 pm I am looking at the performance of a roboadvisor in comparison to the S&P500 index since Jan 2019. The S&P500 has outperformed the roboadvisor by around 18% since then, and the roboadvisor's diverse portfolio appears to have exhibited as much volatility as the S&P500 index during the market downturn this year. Is this a good reason to consider moving all money from the roboadvisor to an S&P500 index? I understand that, in theory, the market trends in the future may result in the roboadvisor outperforming the S&P500, or having more stability than the S&P500. I guess my question is whether, in practice, this seems at all likely for the foreseeable future.
Comparing portfolios based on past data for any particular period is meaningless and not how you should make investment choices. Anyway it is also meaningless to say the other portfolio was a "roboadvisor" without looking at what the investments actually were.

Past data for long times can be used to help estimate expected return and variation in annual returns for different assets and thus to estimate performance of various portfolios. Note that risk, meaning volatility in returns, tells you how far away from the expected return your actual results might be. Most choices of different portfolio have such widely overlapping distributions of possible outcome that comparing projections is meaningless. You have to look at hugely different asset allocations to have much confidence the results will really be different. A very approximate estimation of the range comes from dividing the standard deviation of annual returns by the square root of the number of years. Thus stocks at 20% risk should have the standard deviation of the CAGR at about +/- 3% or +/-4%. That means that unless the CAGRs of the two portfolios are different by that sort of margin that you should not count on actually getting different results from the choice. For example the outcomes for a 100% stock portfolio at 9.6% CAGR hugely overlap a 50/50 portfolio at 7.1% CAGR. A 100% bond portfolio at 5.4% CAGR is probably safely lower returning than 100% stocks under about any circumstances. Even then there can be periods of several years in which all bonds returns more than all stocks. That is more true for long bonds than more moderate durations. Between 1999 and 2020 long Treasuries outperformed stocks. Cherry picking the time frame can produce all sorts of results.
snailderby
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Re: Roboadvisor vs. S&P500 Index Fund

Post by snailderby »

Most roboadvisors hold a mixture of U.S. stocks, international stocks, and bonds. International stocks have lagged U.S. stocks recently. Historically, however, U.S. and international stocks have gone through cycles of outperformance.

Image

All that to say, I would not make your decision based on past performance. If you must compare the roboadvisor's performance to something else, I would compare it to a comparable target-date index fund. Even better, I would look at the actual ETFs that the roboadvisor holds, evaluate whether those holdings line up with your preferences, and ask yourself whether the extra fee of the roboadvisor is worth the added convenience (if any) to you.
dbr
Posts: 33842
Joined: Sun Mar 04, 2007 9:50 am

Re: Roboadvisor vs. S&P500 Index Fund

Post by dbr »

snailderby wrote: Tue Aug 11, 2020 9:22 am Most roboadvisors hold a mixture of U.S. stocks, international stocks, and bonds. International stocks have lagged U.S. stocks recently. Historically, however, U.S. and international stocks have gone through cycles of outperformance.

Image

All that to say, I would not make your decision based on past performance. Instead, I would look at the actual ETFs that the roboadvisor holds, evaluate whether those holdings line up with your preferences, and ask yourself whether the extra fee of the roboadvisor is worth any added convenience to you.
That's a great illustration of how variability in annual returns makes simple estimates of what outperforms what impossible.

Another one is here: https://www.callan.com/wp-content/uploa ... -Table.pdf
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