You Too Can Now Invest Wisely, Using Artificial Intelligence

If you’ve ever interacted with any of the growing number of robo advisors, such as Betterment, Charles Schwab, Wealthfront, or Vanguard, then you’re familiar with how the automated question-and-answer onboarding session goes. How old are you? How much in savings and investments do you have? Are you more interested in growth or avoiding risk? Are you saving for retirement, education, or something else? Eventually the robo advisor will produce a personalized investment plan for you, recommending some mix of equities and fixed income. 

However, while the recommendation will indeed be personalized to your own situation, in most cases the mix of equities and bonds will remain pretty much the same, without regard to changing market conditions. Whether stocks look bullish or bearish next month, the mix of stocks and bonds recommended for you won’t likely change, because it was based solely on the personal information you provided four months – or four years – ago.

Truth be told, most “robo advisors” aren’t robo advisors at all; they’re “robo on-boarders.”

Over the last couple of years, however, I’ve been giving marketing advice to a highly innovative fintech company with a product likely to change forever the way small- and medium-sized investors are served. This company will provide retail investors with access to the same sort of dynamic, market-anticipating advice that can only be had today if you have a portfolio with the heft to afford a more sophisticated (and expensive) investment manager, actively trading your holdings.

AllocateRite is the fintech company, and as far as I know it’s the world’s first investment management tool that uses artificial intelligence technology to support an investor’s financial returns over the long term simply by changing the mix of equities and fixed income investments on a month-to-month basis.

Its AI-based recommendation engine specifies what proportion of funds ought to be invested in stocks, bonds, or cash based on numerous economic and financial indicators from around the world. It issues a “re-balancing notification” to its subscribers each month, transmitted in the form of a signal that automatically re-allocates each subscriber’s investment portfolio, which consists entirely of either cash or a mix of exchange-traded funds (ETFs) in various fixed income and equity categories (consumer staples, healthcare, finance, etc.).

That’s it. That’s the entire product. No individual stocks are picked. No short selling is undertaken, no options are traded, and no special arbitrage situations are exploited. AllocateRite offers plain vanilla investment management, based on real-time data rather than one-time specifications. Each month the funds invested by AllocateRite’s clients are allocated to an updated mix of equity and fixed-income ETFs, based on the predictions derived by algorithms that are constantly upgraded based on past experience. 

The result is that AllocateRite now strives to offer its investor-subscribers a very dependable, equity-like long-term return without the higher level of risk that’s usually entailed in owning equities. Specifically, 

AllocateRite’s domestic composite strategy provides a rate of return comparable to the S&P 500, but with less than half the volatility risk of actually owning the S&P 500’s stocks! 

And just last month AllocateRite’s “composite” – that is, its particular blend of investments – got its GIPS certification. GIPS stands for “Global Investment Performance Standards,” and the independent investment auditing firm Ashland Partners has now certified that AllocateRite is in fact GIPS compliant, which means they aren’t cherry-picking the data or the clients that back up the investment performance I just referred to.

One key aspect of how AllocateRite produces such breakthrough investment results is by actively avoiding the kinds of losses that typically befall equity markets from time to time. As explained on the company’s website:

“We believe that lowering volatility and protecting portfolios when markets are moving down is more critical to a portfolio’s value than performance when markets are moving up.”

Brexit

A great example of this kind of loss avoidance can be found in how AllocateRite’s investment strategy fared last year when the Brexit vote was approaching in the UK. In May, as the Brexit vote approached, AllocateRite’s re-balancing notification suddenly switched from primarily equities to all cash and fixed income. The result: Financial markets lost some $3 trillion in value in the days surrounding the UK’s vote, but AllocateRite’s strategy preserved its early May valuation.

Note that this wasn’t because AllocateRite’s algorithms could actually predict anything, but simply that everyone else’s predictions added up to what the algorithm picked up as dislocations or irregularities in the signals it was tracking.

The Trump Election

Avoiding losses is one thing, but the algorithms frequently benefit from anticipating upswings, as well, which became clear in the wake of President Trump’s surprise election victory. The November 2 re-balancing notice from AllocateRite (the week prior to the election) called for switching to equities, a reversal from the mostly cash and fixed income it had been calling for as recently as September.

The result, of course, was that AllocateRite’s investors fully benefited from a post-election stock market rally that turned into one of the most significant ever. (As I noted above, however, because the algorithms are programmed first to avoid volatility and downside risk, upticks like this won’t always be captured.)

No Custody of Funds

Something else fairly unique about AllocateRite is that even though it sells a system for managing investments, the company doesn’t actually manage any investments itself. That is, AllocateRite never takes custody of an investor’s funds, the way most investment managers do. Rather, the re-balancing signals that are sent out to the large investors, institutions and retail brokerage houses that subscribe are used by these subscribers to manage their own funds, and they can elect either to make the allocation changes themselves or (as most do) to use AllocateRite’s signals as a kind of automated mechanism for switching into and out of various ETFs.

This means that large brokerage houses can subscribe to AllocateRite’s re-balancing signals and white-label the service so that a firm’s retail financial advisors can offer their non-millionaire clients an affordable program for actively moving between equities and non-equities to anticipate market conditions, in order to provide a decent, equity-like return for their clients with less risk of loss.

Let’s face it: There are many things that humans are better at than machines. But interpreting the myriad of complicated and confusing quantitative indicators which may (or may not) predict future stock market activity is probably not one of them. When it comes to market predictions, it’s more likely that we will all soon benefit from a pitched battle among competing algorithms and automated models. And AllocateRite has invented one of the very first contestants.

Today, its AI-based product is relatively unique, so it provides a substantial competitive advantage when it comes to competing for low-cost, retail investors with a thirst for dependable long-term results. But no business success ever occurs without producing a slew of competitive offerings.

As the battle begins to heat up, and as these competitors begin to tout their own expertise and promote their own wares, my advice is:

Always check whether they are GIPS compliant.

Full disclosure: As a member of AllocateRite’s Board of Advisors, I own a small percentage of the company. I’ve also invested a portion of my own portfolio in AllocateRite’s domestic composite strategy, through TD Ameritrade.