Wealthsimple Robo-Advisor: Hands-Off Rules-Based Investing

Wealthsimple Robo-Advisor: Hands-Off Rules-Based Investing

July 26, 2018 0 By Jeremy




Wealthsimple Robo-Advisor: Hands-Off Rules-Based Investing

As an individual do-it-yourself investor, I have not given much thought to robo-advisors. I believe that I can invest my money in a rules-based systematic manner better and cheaper than a financial advisor service can.  However, I was looking into a robo-advisor called Wealthsimple and came to the realization that much of what a robo-advisor does blurs the line between rules-based and systematic.

In this post, I am going to look into robo-advisors and specifically Wealthsimple and actual put some of my own money to work with them.

First however, let’s look at what robo-advisors are and whether that are rules-based or not.

Are Robo-Advisors Rules-Based?

Robo-advisors are not rules-based investment strategies in the same manner as Dual Momentum, Accelerated Momentum, Stocks on the Move, or Global Value. These systems move you in and out of ETFs based on factors like momentum and value.

Robo-advisors are more like the Coffeehouse Portfolio or Harry Browne’s Permanent Portfolio, where money is put into various asset classes based on specific asset allocation rules based on the investor’s profile.  The robo-advisor then will adjust the investor’s asset allocation over time, as the investor gets closer to retirement or achieving their goals.

However, the way a robo-advisor puts together a portfolio is driven by a rules-based strategy with a number of different elements.

Rule #1: Invest According to Your Risk Profile

Robo-advisor portfolios are built with the investor’s risk profile in mind.  Most often down with a survey, the risk profile tells you and the robo-advisor if you are a conservative investor, balanced investor, or growth investor.

This assessment dictates what your asset allocation will be.  Here is how Wealthsimple allocated your funds based on the risk assessment:

Conservative Investor:

Wealthsimple Conservative Portfolio

Balanced Investor:

Wealthsimple Balanced Portfolio

Growth Investor:

Wealthsimple Growth Portfolio

Rule #2: Invest Using Index-Based ETFs

Robo-advisors use low-cost ETFs to build their portfolios.  These ETFs track indexes in the assets displayed in Rule #1 above.  Here are the list of ETFs that Wealthsimple uses in their Canadian-based service (click here to see the U.S. list):

Wealthsimple ETF Selection

Rule #3: Diversification

With the combination of the three asset classes, and the broad-based ETFs presented above, Wealthsimple (and all robo-advisors) strive to be diversified.

They invest across a number of markets, including U.S. and Canadian equity and fixed income, Real Estate, and foreign equity.

Rule #4: Passive Buy and Hold

The forth rule robo-advisor strategies employ is a passive buy and hold approach.  Once the asset allocations are set and the initial funds are bought, then the portfolio is let to perform as is does.  There are some tweaks that do happen, and those are the next two rules.

Rule #5: Automatic Rebalancing

Wealthsimple uses automatic rebalancing to maintain the asset allocation based on your original risk tolerance assessment.  So let’s say one year your U.S. equities allocation does very well, and instead of 32.5% of your assets being in a U.S. ETF, you now have 50%.  Wealthsimple will sell some of that U.S. ETF to bring it back to 32.5%.  The money from the sale would then be put into another part of your portfolio did not do as well, and is below its target allocation.

By doing this automatic rebalancing, the portfolio’s risk is balanced back to the original target.

Rule #6: Automatic Dividend Reinvestment

Any money earned by the portfolio that comes from dividends is automatically plowed back into the portfolio.  This dividend reinvestment helps with the compound returns of the portfolio and can be very beneficial.

So Are Robo-Advisors Rules-Based Investment Strategies?

As you can see above, robo-advisors operate under a strict set of investment rules.  Although they are different types of rules than the Accelerating Dual Momentum strategy, they do force the investor to invest in a methodical and systematic manner.

In that way, I would argue they do have merits as a systematic strategy and are worth considering, especially if you have little time to manage your own portfolio.

Taking the Leap: Setting Up a Wealthsimple Account

I have debated long and hard about using a robo-advisor like Wealthsimple.

What has been holding me back is that I use rule-based investment strategies for most of my investment capital.  With a robo-advisor, I would be turning my money over to someone else to manage.  Even though I have argued above that the rules they follow are systematic in nature, it still does not allow me to manage my investments on my own.

However, just as having a diversified portfolio is important, so is using a diversified mix of strategies.  By implementing a robo-advisor as part of my investment portfolio, I am actually making my portfolio stronger.  I will be using multiple strategies which does not put all my strategies in one basket.

It is not going to be a huge piece of my portfolio, however it is not going to be small enough to be inconsequential.  If the portfolio performs well, then it should have a substantial impact on my net worth and retirement income.

For the rest of this post, I am going to explain the process I went through to set up the account and transfer money from my employer RRSP account (like a 401-k but for Canadian) into a Wealthsimple RRSP.

Opening up a Wealthsimple RRSP

The first step I did when opening the Wealthsimple account was go through the risk profile survey.  Based on this survey, Wealthsimple has determined that the best portfolio based on my goals and risk profile is a Growth Portfolio.  Here is how the portfolio will be structured (remember I am a Canadian!):

Wealthsimple Robotic Investing AllocationTransfer from Existing Account into Wealthsimple

Using the Wealthsimple site, I had to walk through a number of steps to initiate the transfer of funds from my Sun Life RRSP into my newly opened Wealthsimple RRSP.  With that done, now I wait.  Here is what the account looks like as of tonight:

Wealthsimple RRSP Account Pre-Transfer

Not very exciting at this point, however once the account gets funded I will update this post.

So, if you want so get updated when the transfer goes through, and see what the ~$25,000 looks like invested with Wealthsimple, then please subscribe to the newsletter.  I will send you an email when new posts go live!

 

 

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