Several years ago I began writing columns on computer generated trades, and more recently on the new Robo Advisor platforms. I have mentioned there are pros and cons to allowing computers to make your investment decisions. On the “pro” side, computers may remove emotion from the process. Emotions have damaged many investor portfolios. Although, one could argue that since computers react to market movements, which are often emotion driven, then in some ways the unemotional computers are acting on emotions. Another Pro for the computers is the ability to react quickly. They are always ready, having no other purpose than to look 24/7 for triggers that demand a trade be placed. They are never out on the lake while disaster is happening in the markets. The downside of that is that sometimes patience in investing is a virtue.
On the “Con” side, computers cannot analyze non-data sources like a human. An example happened in our office several weeks ago when we decided to move some money to cash as we anticipated the potential negative impact of the new coronavirus spreading in China. As humans we saw a risk rising. A computer knows nothing of any virus and only makes decisions in reaction to what it sees happening in the various markets. The computer would have to wait until the virus news actually impacted some data, then decide what to do about it. In so doing it becomes reactive rather than proactive. As the computer reacts it moves markets more, causing other computers to react. As the reactions escalate it can resemble a bunch of dogs chasing each other’s tails. Thus, you can see why we keep hearing “Biggest single day gain/loss in market history” on the nightly news. Plan on hearing that a lot going forward.
I don’t think investors should be particularly concerned about volatility for volatilities sake. It is the nature of the new computer driven investing systems that we have created, and it is here to stay. It is more important to stay focused on the real long-term drivers of the markets and assess how they might affect your portfolio over time. For example, do you believe the current news (virus in this case) will have a significant effect on corporate profits, and for how long?
The computer age has created new opportunities for investors. Computers are very quick at making decisions based on data, but their trading speed and algorithms can make them susceptible to over-reacting. The wild market swings they create might open investment opportunities for human investors who have an ability to understand the news beyond the numbers. These swings could potentially give them a chance to add some bargain priced stocks to their portfolio, or on the upside, take profits on some holdings. I do not suggest investors engage in daytrading as that is a very dangerous investing practice. But I simply want to point out that with some common sense you might find ways to enhance your long term portfolio during times of oversized computer-generated volatility.
Hi, I'm Dan. I'm a CFP® Professional.
Securities and advisory services offered through Commonwealth Financial Network®.
Member www.finra.org / www.sipc.org , a Registered Investment Advisor. Wyson Financial, 375 E Riverside Dr, St. George, UT 84790
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