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Taking the Person Out of Personal Finance

Automation will mean better outcomes for investors.

Don Phillips, 07/27/2016

There’s never been a better time to be an individual investor in terms of choice, cost, and safeguards, especially if you reside in the United States, which consistently ranks at the top of Morningstar’s global survey of best markets for fund investors. The range of investment options offered to investors has never been so great and the pricing has never been so transparent or so low. The toolkit available to even the humblest of investors dwarfs that that the most elite professionals had 20 years ago. In a very real sense, the playing field has been leveled.

Improved access has not been coupled with increased enthusiasm, however. While the tools are available, the benefits of using them strike many as being greatly diminished compared to decades past. Bonds offer anemic yields and seemingly little upside. Equities seem reasonably valued with few pound-the-table bargains. The only generally agreed to be cheap area is emerging markets, and investors who have been nibbling there have been repeatedly punished in recent years as this statistically inexpensive area has grown even more so.

Compounding the problem are the lingering aftershocks of the financial crisis. Despite magnificent gains in domestic-equity prices, the trauma of steep losses in real estate and equities during the crisis has scarred many potential investors, who, having missed the rebound, now feel little compunction to re-enter the fray. The press and many politicians continue to vilify the financial-services industry and perpetuate the myth that investing is something only the 1% can do, thus causing even more investors to stay on the sidelines. In short, these are the times that try investors’ souls.

Amid this gloom, Warren Buffett’s comments at the annual Berkshire Hathaway meeting struck a wonderful counterbalance. Buffett sees not only the stunning progress of the past century, but also great opportunities still ahead. In one insightful observation, he notes that the average American today enjoys a higher standard of living than even the richest industrialist of a century ago in terms of our access to comfortable and speedy transportation, entertainment, and communications. Our quality of life, like our access to investment vehicles, has never been better. If only more of us could maintain Buffett’s wise perspective, surely our investment results would improve.

How does one make sense of the reality of progress and the pervading feeling of lessened opportunity? More generally, how does an investor see beyond his or her short-term emotions in order to make wise investment choices? I think part of the answer must be to take our personal feelings out of investment implementation and put as much of our investing on autopilot as possible. As we’ve shown in the comparisons between time-weighted and dollar-weighted returns, investors are their own worst enemies. And as advisors guide most of the investments that generate those results, it’s clear that advisors themselves are subject to the same human emotions that undermine our collective investment results.

Lack of choice is no longer the obstacle to investment success; lack of discipline is. If we can take the human element out of making regular contributions, out of rebalancing, out of sticking with the unloved and trimming the beloved, then we can improve our investment experience. We have met the enemy, and it isn’t Wall Street, or the press, or whichever political party you dislike. It is ourselves. A good financial planner is a valuable ally, but advisors, too, are human. That’s why the best advisors will work with you to take both you and them out of the day-to-day business of implementing your plan. They will set up automatic withdrawals and contributions, automatic rebalancing, and in so doing take the person out of your personal finances. The greater distance we put between our emotions and our actions, the better we will fare.

It’s no accident that investors fare better with 401(k) plans, which put contributions on autopilot, than they do with regular accounts. Similarly, it’s clear that investors do better with balanced or target-date funds, where the asset-allocation decision is taken out of their hands, than they do allocating on their own. In time, I suspect investors using robo-advice will fare better than those directing their own accounts.

So, while the toolkit may be more varied and of higher quality than ever before, part of a successful investment strategy may well be using restraint in deploying that kit. The ability to trade around the world, around the clock, around the web is as much a curse as a blessing. It tempts us to over-manage. Yet like governments, those investors who manage best are generally those who manage least. In John Bogle’s words: “Don’t just do something, sit there.”

Fortunately, new tools in today’s technology-savvy toolkit make it easier than ever to put your accounts on autopilot. You can now automate contributions, step-up contributions, withdrawals, dividend reinvestments, rebalancing, and even tax management. Use the robotics of automation to simplify your financial life. Take the person out of the implementation of your personal finance. It will help you avoid the insidious pessimism that preys upon us all and to instead focus on the tremendous creativity man can exert over time. For it is those who grasp this greatness who best reap its rewards.


Don Phillips is a managing director of Morningstar, Inc.

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