Yesterday we published performance data for 9 of the major robo advisers. We’ve tracked how they have done over the last 12 months and 2 years (where available). And looked at how much risk they took to do this. You can get the full details and 'Meet the Robos', here.
On average, the portfolios that contain the most shares, typically described as ‘higher risk’ portfolios, turned an investment of £5,000 into £5,353 in the 12 months to September 2018. For comparison, although by no means a perfect indicator, the FTSE 100 would have grown to a lesser £5,305. And the leading easy-access cash ISA £5,062. These numbers are after all investment charges.
Over a period of 2 years, for those robo advisers which have been operating for this long, the three best performers with higher risk portfolios were Nutmeg, evestor and True Potential.
Although performance is the most juicy number we all want to see at the end of the day, I do want to drag ‘risk’ onto the table as well. Returns are all about where we get to. Risk is what the path looks like on the way.
Investment gonks will talk about 'maximum drawdowns' to illustrate how bumpy a particular ride has been. It simply measures the difference between a high point and a low point. Let’s say an investment peaked at £10 one month, and reached rock bottom of £2 the following month. That would be a maximum inter-month drawdown of £8. (Stay with me folks!)
So let’s look at this picture below. This shows us how much these most punchy portfolios made over 12 months. What your £5,000 would have turned into. And what the most frightening month could have looked like on the way – what’s the maximum you would have lost if you’d bought at the top one month and sold at the bottom in a subsequent month? The main thing to observe in the chart below is that the FTSE 100 was the most volatile. And returned nearly the least. So all that risk you’re taking is a bit pointless, when you look at the returns.
Apologies. But if you get the above, then you understand the Nobel prize-winning "Modern Portfolio Theory" and pretty much everything you need to know about investing. (With apologies to Harry Markowitz who clearly added a few more complex nuances!)
Here’s why it matters. Even if you think robo advisers are a pile of unproven, new-fangled ****, look at your own investments. The vast majority of DIY investors have too much in the UK. And do not diversify well. This makes our journeys pointlessly bumpy. The main benefit I think the robos give us is a robust portfolio, crossing different geographies, investments and business types. This gives us a chance of higher returns, whilst keeping risk low.
However and wherever you invest, make sure you’re spreading the love around. Being promiscuous when investing is encouraged! This doesn’t mean you should go nuts and start choosing lots of different robos and platforms and ISA providers. Just make sure your investment provider of choice is supporting a good mix of investments under the bonnet. An analogy might be that you only need one shop. But choose a balanced range of products to put in your basket.
For those who don’t know what to pick, the robos offer a ready-meal to pop in your ISA basket. Check out what their customers have to say about them here. Or read our beginner’s guide to robo advisers here.
Have a great weekend everyone. Somewhat randomly, I have a new electric chainsaw to play with and a tree to fight. Is this my mid-life crisis, I wonder? The female equivalent of a yellow Porsche?
Oh well, at least it’s cheaper.
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Robo advisers are a way to invest for people who don’t give a hoot about the stock markets, want someone else to do it for them or for seasoned old dogs who can't be bothered with ongoing portfolio maintenance.
See how we analyse and compare the performance of 9 leading robo advisers which together represent over 80% of UK robo adviser assets today, in the 2 years leading to 30th September 2018.Our Q3 Robo Performance Data
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