It’s all very well talking about robo advisors and how online investing can transform your life. It isn’t until the rubber meets the road that you see for yourself what is involved step by step and what the risks and rewards can be. I’ve always found that examples are the best way to describe how something works. So step forward Tod * who has graciously allowed me to use his story on how the robo advisor WiseBanyan helped him over the last 4 years (and what this could mean for you).
Robo Advisor Early Adopter
Tod started his financial transformation back in 2013. He cut out the crap and started spending less than he earned. He also realized a guy like him in his early 30’s could do more with his excess cash than leaving it in the bank. Tod is what we call an ‘early adopter’. He knew he didn’t have the time or the expertise to play the stock market himself. However, he heard about an emerging force, the robo advisors and investigated more.
Tod liked what he found. Robo advisors did what he didn’t have the confidence to do. Manage the ups and the downs of the stock market automatically – to generate long-term returns. As his goal was long-term (early retirement) the robo advisor model seemed to align naturally with his goals.
The big part about selecting WiseBanyan as the right platform for Tod was zero fees for normal customers without complex requirements. Tod understood that most ‘managed’ services had fees that would eat into his returns. Given he didn’t expect to do anything more complex that makes steady investments that would slowly increase with confidence, WiseBanyan seemed like a perfect fit.
Starting Out with a Robo Advisor
So how did Tod start his journey off? Although he classified himself as an early adopter, he also wanted to test the process at first. And with zero fees and zero commitment, WiseBanyan’s platform helped him walk before he could run. For the final six months of year 1 back in 2013, Tod simply re-invested the price of a few expensive cups of coffee each week into WiseBanyan. Even with less caffeine powering him, signing up was straightforward. Tod established his WiseBanyan goal as ‘retirement’. He set up stocks to be 90% of his holding (I’ll explain this in more detail in an upcoming post). He also opted to transfer funds from his checking account monthly. All secure, automated and completed within minutes! He was now an investor!
So how did his test work out? How did his first year (June ’13 to December ’13) go for him? The results went rather well. Tod isn’t an affluent guy and he wanted proof before he would invest more of his hard earned cash. He invested $10 per week for that first year. So after 6 monthly deposits, he deposited a total of $240. He gained returns of $57.12 for a total fund of $297.12. Nice! Not retirement overnight nice but nice enough for him to say ‘I’m going to keep going, what should I do in ’14?.
Gaining ‘Robo’ Confidence
Moving into ’14, Tod decided to invest more seriously in his WiseBanyan account. He freed up excess funds through a combination of less expensive coffee and by cutting the cord on his cable bill. Cutting the cord back in ’13, I told you he was an early adopter!
This allowed Tod to up his investment to $200 per month. For him, this represented an educated risk. The first six months went well. No stock market crashes and the money coming back was much (much) more than would have been the case stashed in the bank. Why not look to expand his investment (but not to the point of risking it all on black, Tod was still making good use of employer match funded 401K etc)? By end of 2014, Tod’s investment fund looked like this:
Not as big a year in terms of % returns (2013 was 23.8%, 2014 was 5.5%). However, the running total was starting to build impressively without compromising Tod’s life too much. Let’s move this story on to 2015.
Should I Stay or Should I Go?
After really good returns during ’13 and ’14, more was expected during ’15 so Tod maintained his investment approach used during 2014. $200 bucks a month with an ongoing emphasis on stocks over more stable bonds. However (isn’t there always a ‘however’) two of the large stock markets lost ground during 2015, the S$P 500 and the Dow Jones. As robo advisors typically use stocks to build returns, they were not immune to this relatively slow downturn which hurt growth to the point Tod’s investment actually shrunk, albeit only be 2%. This meant Tod’s investment at year-end looked like the following:
This was a crucial time for Tod’s learning journey. At this stage, he had 2 main options, leave while still in profit or ‘keep on trucking’. Tom took a step back, researched some more and realized 3 things:
- His goal was long term. 1 bad year shouldn’t mean going back to bank levels of (non) interest. He reasoned that the real danger in long-term investing is making decisions based on shorter-term progress.
- WiseBanyan had helped give him some saving discipline. The auto-deposits happened without him needing to take action and gave him an investment route without needing to think.
- The platform had proved itself. When the stock market started to go down, the ‘robo’ automatically took steps to protect him without him needing to get involved. A loss is never good but demonstrating you have a degree of protection is!
With these in mind, Tod maintained his focus on his long-term goal and did indeed, keep on trucking!
Keep on Trucking
2016 was another year like ’13 and ’14. Returns were healthier and so was Tod’s attitude towards his investment. With increasing trust, he stopped analyzing returns each week and checked in every few months. After all, this was a long-term play, not an attempt to time the market! Tod got a work promotion and rather than expand his lifestyle to consume every new dollar, he doubled his investments. So now, $400 each month went to his retirement fund. Did that make a difference?
In short, yes! Tod gained $884.83 in interest alone thanks to a very healthy (but not unprecedented) growth rate of 8.9%. $884.83 in interest alone! When Wealth-Hack talks about compound interest, this is that mathematical wonder working in practice.
As you might have suspected, Tod maintained his focus for 2017 and by the middle of this year, has already gained $2,000 in profit during the first six months of the year. Assuming he maintains his long-term focus, Tod is on track to retire at an age considerably earlier than his peers. Just think, all that from a few cups of coffee per week……..
Lessons for the Tod’s of the Future
So what can the rest of us learn from Tod and his journey towards financial empowerment over the last 4 years? Firstly, it doesn’t take a lot of money to get moving. Reduce a luxury, invest the saved cash and get some financial momentum going.
Secondly, this was a good route to use to supplement more traditional forms of long-term savings. Automating contributions introduced discipline and Tod’s returns over the four-year window were impressive, they averaged just under 10% for that time period. Way exceeding what he could have achieved with bank interest rates.
We also learned that any investments tied to the stock market are subject to fluctuations, sometimes significant. Although ’15 wasn’t a horrible year, it tested Tod’s staying power. If Tod was investing for a goal that was shorter term, say 3 to 5 years, he could have hit a ‘bad run’ of 2/3 years of negative returns and walked away with low returns or even a loss. All expert advice highlights that investments like this work best when the goals are long term. Our case study supports that evidence.
So what do you think? Do you have long-term goals that could do with a financial power-up? Could WiseBanyan help? If you want to have a play yourself, please click any of the WiseBanyan links within this post.
We have also published a ‘how to invest using WiseBanyan article which gives more detailed hints and tips on how to make WiseBanyan work for you. Click here for more or comment below to get engaged on this game-changing topic.
* A few things. To keep this simple, we have taken tax out of the equation. We’ll deal with that in a separate post. The name Tod is an assumed identity used to show you what it would have been like if you had taken the leap back in ’13. I know I wish had now! But his numbers are very real. Our friends at Senzu pulled together the returns based on actual people investing via WiseBanyan.
|James Burns. Founder @ Wealth-Hack|
|w: wealth-hack.com||e: firstname.lastname@example.org|