The Rise Of Robots & The Risk To Passive

In Tuesday’s post, “A Shot Across The Bow,” I discussed the recent “Tech Wreck” and the warning sign that was delivered when trading algorithms begin to run in the same direction. To wit:

“The plunge was extremely sharp but fortunately regained composure and shares rebounded. A ‘flash crash.’

One day, we will not be so lucky. But the point I want to highlight here is this is an example of the ‘price vacuum’ that can occur when computers lose control. I can not stress this enough.

This is THE REASON why the next major crash will be worse than the last.”

Of course, it generally isn’t long after publishing commentary about the dangers of the current crowding into ETF’s, that I receive some push back.

Shocker: For fee broker advises against indexing https://t.co/VfCIYBEMnp

— JiveJoseph_Duarte (@JiveJoey_D) June 13, 2017

First, I am not a “broker.” I am a “fee-only” investment advisor which operates under the “fiduciary standard.” While we do charge a below average fee for our services, our focus is on capital preservation and total portfolio returns to achieve our client’s long-term financial planning goals. Our client, and most importantly their hard earned savings, are our priority. (Read more in “The Financial Manifesto.”)

Secondly, I find a consistent uniformity of those who have fallen victim to the “buy and hold” and “passive indexing” mantra such as:

They have never been through a major bear market.

Have done little, if any, historical analysis with respect to market dynamics.

Are generally very aggressively exposed to the markets leading to a need for “confirmation bias.”

Have little or no understanding of the impact of loss with respect to long-term outcomes.

Are generally investing with very small sums of money in the hopes of building exponential wealth.

Believe in the long debunked theory of “compounded returns” in the markets.

Lastly, these individuals are NOT “passive” investors. They are simply “passive holders” while markets are rising and will become “active sellers” during the next significant decline.