4 Steps to Building Your Own Robo-Advisor

Julien Brault
by Julien Brault July 24, 2017 / No Comments

I love Canadian robo-advisors, so I won’t devote any time explaining why their index investment strategies are attractive for investors. If you’re not convinced, check out this article that explain why Canadian mutual funds are rubbish.

The beauty of a robo-advisor investment strategy is that it is simple—so simple that anyone can build a robo-advisor in a few easy steps. Here’s what you need to do:

Determine your risk profile

The first thing you must do is evaluate your risk profile. In other words, to determine how much risk you’re willing to take to maximize your potential return. It’s not complicated, but before we move on to the next point, we need to understand a few things. Just because you enjoy parachuting or mixing Red Bull with alcohol (not a good idea), doesn’t mean that you should invest in a risky portfolio.

Your risk profile depends on two things. First, your ability to keep a cool head in case the value of your investment drops, sometimes significantly, and secondly, your investment horizon. In other words, if you invest over the very long term (such as a young investor planning for retirement) and like Warren Buffett you’re not too worried about fluctuating stock prices, a risky or aggressive portfolio is likely the product for you.

To determine your risk profile, you can visit robo-advisor sites such as Wealthsimple. Here’s a complete list of Canadian robo-advisors. You can answer their online questionnaire without opening an account, after which they will direct you to one of their portfolios. What kind of portfolio is it? Is it a conservative, aggressive, or moderate portfolio?

Choose an ETF portfolio on the web

You can certainly be your own portfolio manager and build a portfolio yourself. That said, there are plenty of free model portfolios available on the internet built by professionals.

One of the most known sources in Canada is Canadian Couch Potato. The name of the blog is silly, but its author is a respected portfolio manager named Dan Bortolotti, and his portfolios have the advantage of being very simple and low-cost.

In the same genre, BlackRock also has model portfolios that I like for the same reasons as I like those of Canadian Couch Potato. It’s obvious that BlackRock puts only iShares ETFs (managed by BlackRock) in its model portfolios, but they aren’t bad ETFs. And like those from other Canadian ETF leaders like Vanguard and BMO, their fees are very low.

Then, you’re free to take a look at the different Canadian robo-advisors and to reproduce them in your brokerage account. They are good portfolios, but they tend to contain a greater number of ETFs, which makes the task more difficult as an investor, and which could cost you more in fees.

Put an automatic investment plan in place

So far, you’ll agree that I haven’t revealed any big secrets. After all, you probably already know that you can copy a model portfolio into your brokerage account. What you probably don’t know, however, is that some Canadian discount brokers offer automatic investment plans. Such a plan allows you to put your investments on a sort of autopilot, which is one of the main benefits of robo-advisors.

The first option is very attractive for those without a lot of money to invest. It’s Virtual Brokers’ Kick Start Investment, which has the advantage of being completely free for students and those who have graduated less than two years ago. For everyone else, it costs $50 per year, which is still not very expensive.

Overall, Virtual Brokers’ program allows anyone to build a portfolio consisting of five securities and to put an automatic investment plan in place with a minimum of $100 per month.

Every month, a predetermined amount is withdrawn from the user’s bank account and the securities are automatically bought at the same proportion, at no cost. The program lets you buy stocks as well as ETFs, but the five-security limit makes investing in stock less appealing, because five securities are not enough to be adequately diversified. However, this program is good enough to put a Canadian Couch Potato (three securities) or BlackRock (five securities) model portfolio on autopilot.

The second option, ShareOwner, lets you do the same thing with a portfolio of any size, but its costs are somewhat higher. There’s no limit to the number of securities in a portfolio, but the number of securities that can be purchased through this broker is limited to a selection of about 400 stocks and 50 ETFs (Canadian and American).

Rebalance your portfolio every six months

Unfortunately, no Canadian broker, to the best of my knowledge, has an automatic rebalancing service. I think it should be offered, but in the meantime, you’ll have to do it yourself. There are no rules fixed in concrete as to how often an investor should rebalance their portfolio. I assume that you’re busy, so doing it every six months should be enough, especially if you limit yourself to investing in ETF indexes like the robo-advisors.

If you don’t know why you should rebalance our portfolio, rest assured that it’s very easy. It’s a very important task to ensure that your portfolio remains similar despite market fluctuations.

Is it still unclear? Let me give you an example. Let’s not complicate things and assume that you decide to emulate Canadian Couch Potato’s aggressive portfolio in your account. When you began investing, your portfolio looked like this:

  • 10% Vanguard Canadian Aggregate Bond Index ETF (VAB)
  • 30% Vanguard FTSE Canada All Cap Index ETF (VCN)
  • 60% Vanguard FTSE Global All Cap ex Canada Index ETF (VXC)

Three years later, the Canadian economy didn’t change much, but the Vanguard Global Fund (VXC) performed very well thanks to the U.S. economy and the emerging markets, so that you have the following breakdown in your brokerage account:

  • 6% Vanguard Canadian Aggregate Bond Index ETF (VAB)
  • 21% Vanguard FTSE Canada All Cap Index ETF (VCN)
  • 73% Vanguard FTSE All-World ex Canada Index ETF (VXC)

Rebalancing your portfolio, in this case, would be tantamount to selling your VXC securities to reduce its proportion to 60% compared to the total value of the portfolio, and to buy VAB and VCN to return to their former proportion.

It’s not rocket science. And if you’re like me and have a short memory, go to futureme.org, a website that lets you send emails in the future, and send yourself pre-programmed emails every six months for the next decade (or longer, if you’re patient). Your email should indicate it’s time to rebalance your portfolio, while specifying the initial asset allocation. This way, your current self can remind your future self about the order.

Julien Brault is the CEO and co-founder of Hardbacon, a fintech start-up that built an app that sync with your investment accounts, analyze your portfolio and help you manage your money. Before Hardbacon, he worked as a business reporter at Les Affaires in Montreal.

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