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The Auto-Pilot Investor

Respect, but Respectfully Disagree…

Here at Signals Matter, we share a healthy respect for our competitors as well as their viewpoints. Two that come immediately to mind are the online services provided by and

These (and many other) online brokers are “automated” advisors promoting minimal personal interaction but customized attention and a heavy reliance on software—a fancy term for rebalancing cookie cutter bond/stock allocations…

little sailor

They claim to use advanced algorithms to optimize “personalized” portfolios.

One-Size-Fits All “Customization.”

But as we see it, what they really do (besides some helpful tax-loss harvesting) is begin with a one-size-fits-all bond and stock allocation and then increase the bond percentages depending on your age or risk tolerance.

This is all fine and good. It’s what almost all advisors do, from the big banks to the Main Street advisors. But it’s not as good as it seems, nor as good as it needs to be...

If you are a client of such a service, or considering making such a move, we hope you first give some thought to the risks we see in these online trends, which are effectively becoming the “Walmarts” of portfolio construction—huge, convenient, and inexpensive: yes.

But good enough? No.

Elegant Simplicity—Buy and Hold.

Founded by proponents of the low-cost, passive investment, buy-and-hold values of old-school market analysis (Wealthfront’s CIO is the legendary Burton Malkiel), these companies offer an elegant and indeed time-tested service at significantly less expense than the entire wealth advisory universe—from Ed Jones to Wells Fargo to JP Morgan. (But we still beat their price model…)

In short, they offer exceptional value for a solid (yet incredibly easy) product.

Their premise, as simple as it is smart, effectively boils down to this: Passively held stocks and bonds portfolios have historically outperformed even the best active strategies and managers over the long run.

Such services therefore advise their clients to buy a basket of inexpensive stock and bond ETF’s and then essentially put their portfolios on a disciplined and deliberate autopilot—save for some minimal rebalancing. These sites represent the finest in passive investing success. We genuinely admire them.

In fact, their models and portfolio construction are so basic in their elegant simplicity that we at Signals Matter can (all modesty aside…) easily replicate their “customized” portfolios (“ETF basket”) in about 5 minutes.

As you can imagine, however, there’s a reason we don’t think that’s good enough anymore.

The Simplicity of Passive Models Is Simply Not Good Enough for Today’s Market Conditions.

Markets, as these robo (short for “robotic”) platforms concede, will of course rise and fall, but the robo platforms are sincerely (and we think wrongly) convinced that a simple stock/bond ETF allocation, along with some occasional re-balancing, is not only the cheapest, but also the most lucrative way to manage a market portfolio over time.

And in some ways—especially looking backward—we actually agree.

Like a Channel dress or a glass of water, we love simple, elegant and time-tested solutions, and there’s no denying the simple genius of market pioneers like Malkiel.

It’s no surprise to us, therefore, that they manage billions and are positioned to redefine the entire pricing model of the financial advisory industry by generating the same passive portfolios at significantly less cost. 

They are today’s heroes and the numbers confirm it. For Less than half the price of the Wall Street banks we hailed from, they meet or beat Wall Street averages by essentially putting the bulk of your money in stock and bond ETF’s and then hitting the auto-pilot button.

Case Closed? Well, Not Really.

As Napoleon once observed:

Today’s hero is usually tomorrow’s goat.

We think the same is true of passive, Buy-and-Hold strategies like Wealthfront and Betterment in particular, or the majority of the higher-priced financial advisory services in general. We know, because we’ve been there…

All of these usual suspects follow the same basic bond/stock allocation models, the former just do it cheaper than the latter. But all of them, we believe, might turn out to be tomorrow’s goats.


Because with all due respect for the wisdom of Princeton’s Malkiel and other devotes of passive investing, we think these legendary strategies of yesterday have missed one key point: The new realities of today and tomorrow.

New Realities.

Based upon extensive macro research and decades of trading market cycles, we at Signals Matter are taking a simple yet blunt stance that conflicts directly with the old-school models we were once trained to follow. Specifically, and for reasons touched upon throughout our Investment Primer eBook, trading signals, blogs, podcasts and Signals Matter Video Updates, we don’t believe the structurally broken markets of today and tomorrow are anything at all like the cyclical markets of yesterday.

We therefore argue that to rely upon yesterday’s market indicators and passive strategies to prepare for and manage current and future portfolios, would be akin to using yesterday’s ham radio rather than tomorrow’s iPhone.

In a central-bank-driven world where distortion rather than fundamentals increasingly guide securities and markets, we think the data and structure of prior market cycles, approaches and portfolio construction has already experienced a tectonic shift.

For those, like Wealthfront and Betterment online (or the Main Street RIA’s or banks around the corner), who trust yesterday’s market cycles and the notion of “biting a stick” (i.e. passively buying and holding) through the lows and riding the highs, we contend that such a passive, time-tested approach will not work in tomorrow’s markets.

This is particularly true if you are of an age where you might not feel like waiting decades to recover from the losses these new market bubbles are poised to create.

Perhaps you’re not convinced. Perhaps you’ve weathered through enough storms and feel you have the stomach for a few more. Perhaps.

But we think tomorrow’s storms will not be like yesterday’s. We think they’ll be stronger and last longer.

2008 Changed Everything.

When the markets crashed in 2008, for example, many passive investors lost 50% or more of their portfolio values. For millions of retirees whose pensions were tied to the markets, this hit portended a potential catastrophe.

Fortunately, many of these ‘08 stories/investors either voluntarily or involuntarily stayed in the markets, which quickly recovered in 2009 and beyond. In sum, their “buy-and-hold” approach worked. The old ways seemed vindicated.

But will such an approach work when the next ‘08-Moment rears its bearish head?

The simple answer is: Nope.

In the next crisis, our markets and central bank won’t have the ability to print more money and keep interest rates at zero to negative for another decade at the rate we did post-08. In simple terms: The US is out of dry powder…

Signals Matter was created in part because we are convinced that the old faith in passive investing is no match for the grossly distorted “new normal” of markets placed at unprecedented risk by central bank intervention.

Instead, active management, constant monitoring of national and global markets, recession signals and banking policies is absolutely essential to safely navigating modern market conditions. Signals Matter will provide this, but traditional banks, RIA’s and buy-and-hold robo shops (so popular, tempting and cheap today) won’t.

P.S. If you look at the S&P in its current bloated state, do you think buying and holding at these all-time highs is a strategy that satisfies common sense?

One thing that never changes—old school to “new normal”—is the basic wisdom of buying low and selling high, a truism that almost no one actually follows…

Another market force that never changes is this one: reversion to the mean. And when this market “reverts to its mean” (i.e. when it tanks…), all those robo advisors will be a disaster to portfolios around the world.

Do you still want to buy and hold?

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