Automatic investment the future of financial markets?
Dwain Ross
15 / January / 20
Visitors: 285
Automatic investment the future of financial markets?
Investors become robots... Electronic automated assistants control investments; stock funds and index mutual funds combine an entire market into one package, while the rest take control of your investment portfolio until you retire. Are all of these many people who invest on autopilot able to make an already growing market go even further?
Let's look at the numbers. The four leading manufacturers in the autopilot industry Betterment, Schwab Intelligent Portfolios, Vanguard Portfolio Advisory Services and Wealthfront almost doubled their asset value to $77 billion last year. According to Broadridge Financial Solutions, in 2016, 82% of new private investments that entered the market through financial advisers (more than 400 billion) were allocated to index funds and ETFs.
According to the research organization ETFGI from London, the total price of portfolios traded in the U.S. has reached a total result of $2.6 trillion. Funds managing portfolios with a specific final date have at their disposal $915 billion.
The new caste of traders
A "new caste" of traders was formed in the industry. Today's investors are nothing like those who financial expert Benjamin Graham once called "enterprising", that is, those who have the zeal and ability to invest time and energy in learning to find trading signals for successful deals.
In contrast, investors buy and hold (or have such plans) their deals despite how much the market is undervalued or overvalued in general. According to Brian Reid, a leading economist at the Investment Company Institute, "we are talking about automated trading, where the majority of assets are left without any movement".
Simply put, the moralistically puritanical view of investment issues, which has been dominating for several decades and is based on the assumption that success stands out by how hard you work for it, now gives way to the agnostic principle, in which traders try to achieve success only by clicking the "start" button of the automatic program.
Mr. Graham also warns that "the easy and proven path to wealth, to Wall Street as anywhere else, does not exist at all". So, we can conclude that if we turn the investment process into an effortless one from our side, and quite thoughtless one, we make it more insecure.
In the late 1960s, Wall Street analysts said that the influx of money from retirement investments should certainly drive the market to other heights. The famous papers were named "one solution share" because the only choice you had to make was how much to buy. You didn't have to worry about the sale. This argument went away when in 1973-74 the market collapsed by 37%.
Often new converts for automatic investment, including various financial assistants, openly chase index funds that show high levels in a heated industry. If the market cools down, they withdraw from such assets, which can make a normal drop a deep peak.
Only the fact that many people prefer thoughtless investment is considered obvious. Not hoping for miracles, they consciously give up such hope. Their thoughts are as follows: when the market collapses, who will be able to better manage a portfolio based on a specific situation in the market a person with his emotions or a computer mechanism?
It is hard to believe that a human EA is able to stop the fall or protect a trader from it, and the usual human sympathy is not enough support if you lose money.
This is quite sensible pragmatism. As mathematician and philosopher Alfred North Whitehead said in 1911, "the development of civilization is moving towards increasing the number of important operations that we are able to perform without even thinking about them.
The evidence that automatic investment guides the stock market up is, say, too inconclusive. With inflation in mind, U.S. stocks today are trading at 29.5 of their average long-term earnings. That's similar to the one that happened in 1929, before the Great Recession.
However, the correlation doesn't indicate a causal relationship at all. According to Vanguard Group, one of the leading automatic investment market participants, the market price of shares reached the current highs in 1999, when index funds had less than 10% of the total number of shares. Since then, the share of index funds has almost tripled, but the market price of shares has fallen by almost 50%.
