All posts by Financial Independence Hub

Artificial Intelligence: Can a machine invest better than a human?

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By Chris Nicola

(Sponsor Content)

Wouldn’t it be nice if we could just ask a computer, “what should I invest in?” In theory, sure. But given the current state of artificial intelligence, I wouldn’t bet your money on it just yet. Simpler, tried-and-true analysis tools help us to do this job without putting our client’s money on the line.

Now, you might think AI for investing is inevitable. After all, intelligent people are coming up with new uses for AI all the time. Diagnosing eye problems. Helping corporate boards hire with diversity in mind. We can make art with it, or use it to spot fake art. With self-driving cars, we’re literally putting AI in the driver’s seat. So, why not AI for investing? In fact, it’s already happening — through the “AI Powered Equity ETF (AEIQ), which invests in a variety of U.S.-based companies and seeks to beat the returns of the S&P 500.” The numbers in this report from July show the ETF was up 8 per cent this year, while the S&P 500 has gained about 1.5 per cent YTD.

Who knows what the future could hold for AI’s capabilities? Let’s take a deeper look.

Why I’ve got AI for investing on the brain right now

I recently spoke about AI at The Summit for Asset Management and I realized that the subject of investing using AI would probably also interest many of WealthBar’s own clients. So here’s what I spoke about and some of my thoughts on the role of AI in the future of automated investing.

Who am I? I’m WealthBar’s Co-Founder and Chief Technology Officer. At WealthBar, my team and I design and build our mobile and online experiences for clients. We also decide what technology solutions to use and how to use them.

AI is really cool right now. It gets a lot of attention and I’d be lying if I said I wasn’t excited by the potential. However, I also need to ensure we’re using the right tool for each job. So far, we have not been convinced that AI is the best solution for the kinds of the problems we currently solve for our clients. More importantly, the current understanding of AI today leads to far more questions and concerns than answers. The biggest of these questions is our inability to explain exactly how an AI algorithm learns and why it makes the decisions it does.

AI-powered? Don’t believe the hype

What is AI?

Artificial intelligence can learn without being explicitly programmed. 

That seems like a good definition that I would use, though what we think of when we say AI and what it really means can be two different things.

Some people will think of AI as a general intelligence: basically, a piece of software, machine or robot that thinks like a human, like in so many science fiction movies that have come out in the past few years (I, Robot, Ex Machina, Her, etc). We’re pretty far from that in real life. But for now, we’re using a definition of AI that’s more limited, precise utility — and one that could have some real applications in the investing world.

AI for investing. How does it work? And how could it work?

Right now, we use it to take on specific tasks. In theory, we could ask an AI “what should I invest in?”

Some financial firms are experimenting with this, or they say they are. But scratch the surface. You find that their process is just based around linear regression. They do some math, which has been around since long before computers. Linear regression is a quick and practical tool that the financial industry has been using for as long as there has been a financial industry. Continue Reading…

What a market decline looks like for a balanced investor

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By Scott Ronalds

Special to the Financial Independence Hub

EDITOR’S NOTE: This blog was first published on the Steadyhand site in January and is being rerun today to provide some insights into this week’s severe market downturn.

I have no greater insights than you do on what the markets might do over the next several months. But it’s been a while since we’ve had any kind of meaningful pullback in stocks and we’re due at some point. It may not happen next quarter, next year or even this decade. But as I noted in my last post, declines and bear markets are a normal part of investing. Are you prepared?

I find the best way to test yourself is with real money. Let’s say you’re a balanced investor and your portfolio is worth $400,000, all invested in the Founders Fund. A modest decline in the markets might see the fund fall 3-4% over a few months. This doesn’t sound like much. Put it in dollar terms though, and it takes on a different meaning. $12,000 to $16,000 sounds much greater – and feels much worse – than 3-4%. Still, no big deal considering the gains you’ve likely seen over the last few years.

Now assume markets experience a sharper decline and the fund drops 6% over 6 months. Your portfolio is now down $24,000. What would you do?

Would you really sit tight if things got worse?

Let’s turn it up a notch. Investors have soured on stocks and markets are under severe pressure. We’re officially in bear market territory with stocks down over 20% and the fund is hypothetically down 12% over 10 months (the fixed income component is providing ballast). That’s $48,000. The media and financial pundits are calling for further losses. Your neighbour’s bragging about how he moved to cash a year ago and is telling you to get out of the market and buy gold. Again, what do you do? Continue Reading…

Stop trying to correct for market corrections — revisited

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By Steve Lowrie

Special to the Financial Independence Hub

In 2015, I published an extended series of “financial stop-doing” posts, suggesting what investors could STOP doing, if they wanted to START building more durable wealth. Almost three years ago to the day – on September 8, 2015 – my “stop-doing” post began as follows:

“Recently, the market has been playing right into an important addition to our financial “STOP Doing” list: Stop trying to correct for market corrections.”

Time has passed, but one thing has remained the same: As current overall markets have again been ticking upward for quite a while, I’m again hearing investors fretting over when the fall will arrive, and whether they should try to get out ahead of it. Since my response remains the same today as it was then, I’ll reprint it for your re-viewing pleasure, updated to reflect the most current available data.

The subject is not a new one to us. In August 2014 and again in 2015, we posted this Q&A: “Is there going to be a market correction (and, if yes, then what)? In light of current events, we’ve now updated that post with current year-end information.

Just as it takes no special skill to predict some days of sub-zero temperatures this winter, we were not being prescient when we said that we would probably experience a correction sooner or later. One need only consider abundantly available evidence to recognize that, viewed seasonally, the market frequently “corrects” itself, sometimes dramatically. It’s only when we take the long view that we can see the market’s overall upward movement through the years.

For example, consider this Dimensional Fund Advisors slide depicting the US stock market’s gains and losses during the past 35 years. The narrow lines illustrate wide swings of maximum gains and losses in any given year. The blue bars show the year-end gains and losses after the dust has settled. Clearly, far more years ended up than down, for overall abundant growth.

This illustration is substantiated by similar findings from JP Morgan.  According to their data, covering 1980–2017, the average intra-year decline of US stocks (measured by the S&P 500) was 13.8% per year, but the annual returns were positive more than 76 per cent of the time, in 29 out of those 38 years.

But first we’d like to challenge the word “correction.” We prefer to think of price volatility as simply part of doing business in the market to begin with. Ever the individual to tell it like it is, Dimensional Fund Advisor’s retired executive Dan Wheeler had this to say in one of his classic blog posts, “The Spinning ‘Talking Heads’”: Continue Reading…

Investing: An amazing concept that deserves more love

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By Scott Ronalds

Special to the Financial Independence Hub

I love Google. Want to know how many grapes are in a bottle of wine? Google it. Need directions from Granville Island to Gastown? Google Map it. Want to watch James Corden’s latest carpool karaoke? YouTube it (Google’s parent company owns YouTube). A world of information is at your fingertips.

A friend of mine adores Nike. He can’t get enough of their shoes, loves their style and innovation, and thinks their marketing is brilliant. He may even have a swoosh tattooed on him somewhere.

Whether it’s Google, Nike, Starbucks, Apple or others, there are a lot of impressive companies out there doing remarkable things. And the really cool thing is that we can own a small piece of many of them. Think about this for a minute. Any individual can buy shares in a publicly-traded company and participate in its growth and success (or failure, as it may be). Investing is an amazing thing. So why do so many people ignore, fear, or just put off investing? (Reports suggest people are sitting on huge amounts of cash.) It’s a question I ask myself all the time.

Investing is simply about owning pieces of companies

I think I know some of the reasons. Investing is risky. But it’s also become confusing and scary: which makes it prime fodder for the media. Corporate and economic figures are dissected with minutiae. Stock prices are updated every millisecond. The lexicon can be baffling (the Steadyhand Dictionary can help you make sense of it). Complex algorithms and trading strategies have emerged. The use of derivatives and leverage have amplified the risks. Unethical practices have been exposed. The whole system has been called rigged. Continue Reading…

What and Who are the Canadian Robo Advisors?

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By Dale Roberts

Special to the Financial Independence Hub

Most investors want or need investment advice. I learned after many decades in and around the industry, including over 5 years as an advisor on lower-fee index-based portfolios, that Canadians are not all that interested in their investments. We’d call that a low interest category.

Nope, folks are more interested in making money and well, living. So most need, or seek advice. Now unfortunately most Canadians by force of habit simply line up at their big bank or mutual fund sales office and sign up to pay some of the highest investment fees in the world. Those fees are crippling, I know, I saw the results when Canadians showed me how they were invested.

But just because you might need an advisor does not mean you have to pay some of the highest investment fees in the world. And yes the fees are important. We know that the fees typically and greatly impact the returns. From Justwealth the chart at the top is a comparison of the potential portfolio returns impact over longer periods, based on an initial $100,000 investment.

We can see that the effect of high fees paid can become exaggerated over time. Remember you pay investment fees every year, throughout the year, and as your portfolio grows over time you pay more in fees as the fees are based on your portfolio value. That’s a nasty kind of negative compounding.

So just what is a robo advisor?

Yup, just as per the image, a robo advisor is an investment advisor that’s well, not human. But don’t be scared. If you want to talk to a human the companies that offer robo advisory services can also put you in touch with real flesh and blood advisor types.

So if a robo advisor is not human, just what is “it”? A robo advisor is simply an online platform that asks you questions to help you get into the right investment portfolio. A robo advisor will ask the same type of questions as would a human advisor. Based on your answers the robo advisor will put you in the appropriate portfolio.

So what type of questions will the robo advisor ask you?

The robo advisor platform may try and gauge your investment knowledge. There may be questions on your net worth and salary and employment status, basic personal details. Each robo advisor offering has its own nuances and I will dig deeper into that in future articles. But most importantly a robo advisor wants to know …

  1. Your time horizon for the monies that you are about to invest.
  2. Your tolerance for risk (the amount or percentage that the portfolio could decline).
  3. Your objectives for the investment, whether you’re looking for more growth, a more balanced approach or a very conservative approach that might include a lot of bonds and fixed income.

And once again, each robo advisor will have its own methods (robo personality?) for asking those questions and discovering your investment personality and needs. If you want to ‘play around’ with a basic robo question and answer process have a look at Tangerine Investments’ Portfolio Selector Tool. Continue Reading…

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