Rebalancing your investments is the key to manufacturing shares in both up and down markets. I touch on it in this article about diversification. Plus, Managing Investments is nearly half of the content in my book.
However, do you have to do the rebalancing yourself? What about Robo-Advisors? Are they any good?
In the past I have avoided Robo-Advisors, but now I’m reconsidering.
I have generally avoided Robo-Advisors for three reasons: investments in the mix, the ability to control the mix, and expense.
I have recently been looking into Fidelity Go. And, I am starting to think that this Robo-Advisor is ready for Prime Time.
Disclaimer: I am not an affiliate of Fidelity or Fidelity Go. I won’t get paid if you sign up. I’m not recommending their product. I am just describing my understanding of how it works. You should do your own research and be sure that you understand what you are getting into whenever you invest your money.
How it works
Setting up an account with Fidelity Go is super easy. First you answer a few simple questions about yourself to help them recommend an asset mix. These are not very in-depth questions, so you don’t need to prepare for them.
Then, Fidelity will recommend an asset mix for you based on your answers. They have seven model portfolios that range from very conservative (20% stock/80% bonds), to very aggressive (85% stock/15% bonds). I really like that they let you click around and compare the different model portfolios and even override their recommendation. That way, you can decide for yourself where to start.
Once you have picked the allocation you like, you can click “Open An Account” and complete the process online. You answer a few more questions, create a log-in, and tell Fidelity how you want to fund the account. You can invest any amount you want, as little as $10 will get you into the market.
There are no fees for opening an account or transferring funds.
Once your funds are in the account, Fidelity Go will automatically invest for you. Then they will monitor your account and rebalance if it gets away from your original allocation, plus regular rebalancing every six months.
Investments in the Mix
If you’ve read my book, you know that I personally like to have exactly five investments in my portfolio: Large Cap Stock, Mid Cap Stock, International Stock, High Yield Bonds, and Investment Grade Corporate Bonds. I love that with Fidelity Go, every asset mix they offer has exactly these five investments in allocations very similar to what I have always used.
Plus, Fidelity Go adds one additional investment type: Small Cap Stock. I have generally not used Small Cap Stock because it has added a level of complexity to my investing that wasn’t worth the extra effort. (Check out my article on investing complexity). When rebalancing, it is pretty easy to make small trades among five investments to keep your portfolio allocated correctly. Adding a sixth investment isn’t super difficult… But I just never found it to be worth the effort.
I have always tried to avoid portfolios that have an asset with less than 5% allocation. That seems like the tipping point where the extra diversification is not worth the extra complexity. But, because the Robo-Advisor is reallocating automatically for you, you don’t have to worry about it. There is no additional complexity added by throwing Small Cap Stock into the mix. You just get the benefit of having one more asset class.
Inside the seven portfolio options available in Fidelity Go, Small Cap Stock varies between 1.4% and 6% of your investments. If you are rebalancing yourself, this is probably not worth the effort. But, with a Robo-Advisor, it is a nice benefit.
Index Funds: No Individual Stocks or Bonds
Fidelity created new funds specifically for Fidelity Go. They are no-load (aka free) and five of the six are based on an Index. The exception is the Conservative Bond Fund, which appears to have fund managers selecting specific bonds.
These funds mirror my investment approach exactly. There are no individual stocks. There are no individual bonds. The strategy is to invest in the market instead of try to beat the market. You are making investments, not making bets. For more on why I like this approach check out my article on S&P 500 Index Investing.
Ability to Control the Mix
This is another area that has kept me out of Robo-Advisors. I want to be able to choose my investments.
Over the years, I have noticed that investors with Financial Advisors are often invested more aggressively than they want. Financial Advisors are savvy investors, and they want to help their clients take full advantage of the market. However, that sometimes leads to portfolios with more risk. Which, can lead to bigger losses during downturns. And, that can lead to selling at the bottom, which is devastating to a portfolio.
With Fidelity Go, they recommend an allocation based on your risk tolerance. But, more importantly, they let you override their suggestion.
I answered their questions and they recommended an allocation that was more aggressive than I’d like. So, I switched.
You need to find the right allocation for you. Just remember, the more risk, the wider the swings during the next recession. If you can’t stomach the rollercoaster, then it’s better to stick to the ferris wheel!
I really like the way Fidelity Go allows you to override their recommendations. So, when you put new money into this account, you have complete control over the way it will be invested. Plus, if you decide to shift slightly higher risk or slightly more stable later, it is just a few clicks!
We live in the golden age of low cost investing.
The market is full of super low-cost index funds that allow you access to the market without having to pay big fees that eat up all your returns.
Because of this market environment, Robo-Advisors have had to keep their fees low to stay competitive. Fidelity Go charges 0.35% per year. That’s it! Just $3.50 for every $1,000 invested per year.
My personal investments use a mix of Index Funds for Stock and managed funds for Bonds. The index funds charge between 0.04% and 0.10%. The bond funds charge around 0.7% to 0.8%. So, an all-stock portfolio would be cheaper than Fidelity Go. But, that’s much more aggressive than I would ever be comfortable with.
My personal mix of stocks and bonds has a weighted cost of about 0.45%. That means, moving money into a managed account is not more expensive than managing it myself! What a magical time we live in!
Fidelity Go will invest my money in an almost identical portfolio and do the regular maintenance to keep me in balance. And, they will do all that for $1 less per $1,000 invested than I am paying now. That’s awesome.
There are a few features that I wish were included in Fidelity Go. They are not deal-breakers for me, but they are limitations of the service.
First – you cannot force a rebalance. Fidelity Go rebalances when your portfolio gets overweight in some areas. Sometimes, there are market conditions that make me want to rebalance and I may miss out on that.
Second – they don’t disclose the conditions necessary to trigger a rebalance. They have an algorithm that determines when to make trades. And, they are keeping that to themselves. But, I’d like to know, so I know what to expect.
Third – you can’t harvest tax losses. If you have a non-retirement Fidelity Go account and there are funds that are worth less than you paid for them, you may want to sell them before the end of the year to realize a tax loss. That’s a common tax strategy, but you can’t do it with Fidelity Go.
However, I’m not generally a big fan of tax-loss harvesting anyway. Sure, you’re getting a tax break this year. But, you’re reducing your basis in your investments, which means you’ll have to pay more later. It’s (mostly) just kicking the can down the road.
Last week I opened a Fidelity Go account, and put a small part of my investments into it. I think the product is ready for Prime Time, but I want to see how it works first-hand for a few months before I go all in.
The risks to switching from a self-directed Fidelity investor to a Fidelity Go customer seem pretty low. I have almost identical investments. I don’t have to do the rebalancing myself. New money is automatically divided appropriately. And, it doesn’t cost more!
I will keep a close eye on how Fidelity Go works, so watch for future articles with updates.
If you have used Fidelity Go (or another Robo-Advisor), how did it go? Did you like it?
I hope this has been helpful! I welcome your comments with your thoughts and questions. And, don’t forget to subscribe to the newsletter to get notified whenever a new article is posted.