Market Volatility: Can Robo-Advisors Help Avoid Emotional Trading?

Market Volatility: Can Robo-Advisors Help Avoid Emotional Trading?

Key Takeaways

    Market volatility can create a sense of uncertainty for investors

    Robo-advisors may help investors avoid making trades based on emotion

    Hybrid robo-advisors can offer the potential benefits of automated decision making with the control of manual investing

Market volatility can alarm those who want to protect their assets from the sharp declines that may occur during turbulent times.

Investors react to volatile markets in a variety of ways. Some people choose more cautious investing strategies, while others become more aggressive. Some consult a financial advisor, while others take no action.

Investors also prepare for market volatility in many different ways, from exiting the markets completely to investing in perceived “safe haven” assets such as gold and silver. Trading technology has given rise to one more way to attempt to mitigate risks from market volatility: so-called robo-advisors, which automate trades and can help minimize emotional impulses.

Market Volatility Seems To Be on Pause … for Now

Stocks have been making steady strides this year. The S&P 500 Index, which is up nearly 16% year to date as of April 18, recently pushed above 2,900 for the first time since last fall. Those gains followed a nearly 20% drop in the S&P 500 between October and December. As market conditions have improved, volatility has drifted downward.

The Cboe Volatility Index, also known as the VIX or “fear gauge,” is a common measure of expected market volatility based on S&P 500 options. The VIX fell to a six-month low of around 12 by mid-April, off about 67% from its mid-December peak.

Still, although it may feel like a fairly healthy market, investors are braced for whatever may be around the corner. Markets are historically cyclical, and many believe that a downturn is on the horizon. But no one can predict when it may happen.

Investor Sentiment and Market Volatility

According to a recent market volatility survey conducted by The Harris Poll on behalf of TD Ameritrade, nearly half of Americans said they have been impacted by market volatility. Of those, 22% described the impact as “very severe.” About 41% of investors said they take volatility into account as part of their investment strategy, with baby boomers being the most likely to factor the effects of volatility into their investment decisions.

The market volatility survey also found that when the market gets rocky, investors like to take action to try to protect their assets.

About 73% of respondents said they made a number of moves as a result of being financially impacted by market volatility. Some changed their asset allocation to be more conservative or consulted a financial advisor. Others tried to leverage volatility to invest more. About 13% of respondents said they felt they had to withdraw from a 401(k), and about 12% said they changed their asset allocations to be more aggressive.

How a Robo-Advisor Can Potentially Help Investors

Investing technology continues to improve, and investors now have more choices for combating market volatility. Digital investment services like robo-advisors were virtually nonexistent five years ago, but they are quickly gaining in popularity.

Robo-advisors allow investors to select appropriate investment portfolios that are recommended based on their financial goals. When it comes time to rebalance the portfolio, the move is made by a team of investment professionals instead of the individual investor, which helps eliminate influence of emotional investment decisions.

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Robo-advisors can assist investors in navigating market volatility more confidently because the investment decisions made by robos are more disciplined and not based on human emotion. Investors who use a robo-advisor can also benefit from the convenience of having the professionals who manage the portfolios make the trading and rebalancing decisions, which can help investors save a lot of time. And depending on the offering, many robo-advisors carry low fees and low investment minimums.  

For investors who are considering investing with a robo-advisor, TD Ameritrade Investment Management LLC (TDAIM) offers Essential Portfolios.

How does it work? First, you’ll answer a few questions about your investing style and goals as well as your risk tolerance and time horizon. Next, TDAIM will recommend a model portfolio that aligns with your goals. Then TDAIM will monitor and rebalance your portfolio to help you stay on track with your goal.

Investing Choices for a More Human Touch

Although robo-advisors can offer certain investors a number of benefits, especially during times of higher market volatility, they aren’t for everyone. They cannot provide the same level of customization as a human financial advisor, who can get to know your financial needs and goals on a personal level and may offer advice more specific to your situation that an automated platform might not consider.

For a combination of online investing and human support, consider a hybrid model such as Selective Portfolios. This TD Ameritrade product offers a broader range of portfolios than the fully automated Essential Portfolios.

One other thing to consider with robo-advisors is that they cannot guarantee returns. Just as with any investment method, nothing is 100% certain.

The Bottom Line

If market volatility is among your top concerns regarding your investments, a robo-advisor may be worth considering for automated trading decisions. Robo-advisors leverage the experience of professional portfolio managers to help you avoid some of the emotional pitfalls that can arise in turbulent trading times.

Consider both the pros and cons of robo-advising as you determine the appropriate strategy to pursue your financial goals, including the fact that human financial advisors might add a more personal touch to financial guidance.

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