Can You Trust Robo Advisors To Make The Best Investment Decisions For You?
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By now, many Malaysians would know that robo advisors offer various advantages, making it a great solution for many investors – especially beginners. They provide investing management at a reasonable cost as well as convenience with their automated processes. On top of that, they also have a low entry requirement, making investing much more accessible to the common folk.

While all these benefits are great and robo advisors have taken the market by storm, a legitimate concern remains: can we trust that robo advisors are able to make the best investment decisions for us? Ultimately, they’re just algorithms…right?

What do “best” investment decisions mean?

Let us first lay out what it means by making the “best” investment decision. Of course, all investors hope to reap huge profits through their investments, but this should not be the only factor to consider when making good investment decisions.

You also need to evaluate various other factors, such as your risk appetite, investment goals, investment horizon, as well as current financial circumstances and obligations. If an investment opportunity involves the potential for great profit in the future but forces you to take more risk than you are comfortable with, or requires you to invest beyond what you can currently afford – then it may not necessarily be the best investment decision for you.

Accordingly, robo advisors have been programmed to take into consideration all the factors mentioned above during the process of building a tailored investment portfolio for you.

Trusting robo advisors with your investment decisions

There are several reasons why robo advisors can be trusted to make good investment decisions for their investors. Here are a few:

1) Robo advisors are developed based on established investment models

All robo advisors rely on some form of established investment models to drive their investment strategies. The most popular is, of course, the Nobel Prize-winning modern portfolio theory (MPT), which now powers a majority of the robo advisors in the market. There are also other alternative frameworks that are used, such as the post modern portfolio theory (PMPT), Sample Portfolios, and Constant Portfolio Weights models – although these are less well-known. Regardless of which framework, robo advisors are essentially backed by substantial research, and as such, can be relied upon to make the best decisions in your interest.

Some robo advisors may even augment their preferred models with additional assistance from artificial intelligence (AI). As an example, MYTHEO – which utilises investment technology that was developed in Japan and has been in use since 2006 – pairs its functional approach with its AI Assist risk-assessing feature to improve the mid- to long-term performance of investors’ portfolio.

2) Robo advisors meticulously build your profile to understand your needs

During the onboarding process, all robo advisors will require its users to answer a questionnaire to help it understand the background and needs of each customer as best as they can. From there, the robo advisor will then use its proprietary algorithm to analyse and build the most accurate profile possible, before constructing a portfolio that best meets your requirement.

The robo advisor’s “accuracy” in creating your profile and constructing a suitable portfolio is dependent on the concept used behind this proprietary algorithm. MYTHEO, for instance, relies on something called the Analytic Hierarchy Process (AHP) to help with the process. Essentially, the AHP is a distinctive decision-making framework that helps people evaluate and prioritise their choices using hierarchies, thereby arriving at choices that best suits their values.

In the case of MYTHEO, it uses this structured analytical process to deliver a tailored portfolio that best matches an investor’s investment profile. Using multiple hierarchies, MYTHEO determines the appropriate weightage from the three functional portfolios that it manages (Growth, Income, and Inflation Hedge) for each customer, as well as the investment elements under each pillar.

3) Robo advisors reduce risk through diversification

Another advantage that robo advisors can bring to the table – thereby enabling them to make good investment decisions for you – is the ability to diversify easily. Diversification is essentially the epitome of “don’t put all your eggs into one basket”; it is a risk management strategy where you invest in a mix of asset classes, regions, industries, or other categories to mitigate losses. This way, if one of your investments in an asset class or sector were to perform poorly, your other ventures will not be affected.

Most robo advisors will allow you to immediately invest in a range of assets once you buy in, such as equities, bonds, commodities, and real estate assets – just to name a few. They are also usually invested in more than one region, mixing assets from developed countries (such as the US and the UK) with emerging markets (such as Southeast Asia, China, and India). To further diversify, some robo advisors may even build your portfolio with assets from various promising industries, including IT, healthcare and pharmaceutical, as well as utilities and consumer staples.

4) Robo advisors removes emotions from the investment process

Robo advisors can help investors to avoid emotion-driven mistakes, such as panic buying or selling, thereby helping to make better investment decisions. A recent survey conducted in the US found that 66% of investors regret impulsive or emotional investing decisions, and 58% agreed that their portfolio performs better when emotions are left out of the equation. While these exact figures may not translate directly to the Malaysian setting, the significance of the study remains clear: the investment process should remain a rational one.

With robo advisors using algorithms to invest, it can limit human bias and emotions from influencing the investment decision process. Investors, too, will be less prone to making knee-jerk reactions to the latest financial news, or attempting to time the market. Instead, they’re more likely to hold on for the long term and dollar-cost average – both of which are proven to be key strategies to successful investing.

5) Robo advisors automatically rebalance and reoptimise your portfolio

All portfolios need to be rebalanced and reoptimised from time to time to ensure that they continue to fit your investment and risk profile while generating optimal profit. This is especially so when there are major fluctuations that affect market conditions – such as the Covid-19 pandemic that has ravaged the global economy over the past two years.

The rebalancing process involves the reallocation of your assets, such as by selling some of your riskier asset classes that have outperformed in the short term and buying more of the less volatile asset classes that have underperformed in the short term. Robo advisors automate this procedure with the help of algorithms, enabling them to quickly figure out how far your portfolio has “drifted” from your original risk profile, and what are the best steps to reoptimise it.

***

It is crucial to understand that all investment decisions – even the “best” – come with a degree of risk, but through algorithms and smart technology, robo advisors can assist you in making the most out of your investments. And MYTHEO – one of the key robo advisors available in the Malaysian market – is ready to facilitate.

Born from a joint venture between Japanese investment management and advisory services provider Money Design, and local enterprise Silverlake Digital INX, MYTHEO has served 160,000 Japanese investors. It also has more than US$1.5 billion worth of asset under management (AUM).

With MYTHEO, Malaysians can begin investing globally with a low entry amount of RM100. Delivering more than 60 exchange traded funds (ETFs) on offer, along with other asset classes available (such as gold and property), MYTHEO’s offerings are also diversified across five regions: Asia Pacific, Africa, Europe, North America, as well as South America. Ultimately, investors will have access to a whopping 373 portfolio combinations, which enables them to indirectly own more than 10,000 securities globally.

In terms of its management fees, MYTHEO charges a low 0.5% to 1% p.a., depending on your investment amount. No other fees – such as trading, exchange, and redemption fees – apply.

Thanks to a partnership between RinggitPlus and MYTHEO, there is currently a promo that offers a three-month management fee waiver for new customers who sign up using our promo code (“MYTHEO”) during this period. Ending very soon on 31 December 2021, this deal is exclusively for our readers, so sign up via this link while it’s still ongoing!

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