Full Disclosure: This is not a sponsored post. The recent December correction was a really rough one for US markets, and a number of readers have reached out to me with concerns over StashAway. I decided to speak to Michele (StashAway CEO) to see if he was able to share his thoughts, and he very kindly agreed to do an interview. I’d originally planned to add my thoughts in at the end of this article, but after reading the responses I felt he did a truly fantastic job with the responses so I won’t spoil it with my thoughts.
You’ll find below the full, unedited responses from StashAway’s Chief Executive Officer (Michele Ferrario) and Chief Investment Officer (Freddie Lim). Regardless of whether you agree with them or not, I think it’s very important as an investor to consider all information and all opinions before making a decision. So if you are a StashAway investor, this is definitely worth reading before making any decisions on your portfolio. Even if you’re not, it’s well worth reading for their insights on the market sell-off, and on their long term perspective towards investing.
Note: Please note that this is not intended to be an endorsement of StashAway. I’ve set out my thoughts on StashAway in a previous article, and I continue to stand by them. This post is intended for readers who have invested in StashAway to hear a different side of the story from the CEO and CIO themselves, to decide if an investment in StashAway is suitable.
StashAway Referral Link
As a reminder, if you’re new to Robo Advisors and want to give it a try, you can use this referral link that I got from StashAway’s CEO. You get 50% off your fees for the first SGD 50,000 invested for 6 months. That’s about S$94 saved on fees, so if you’re going to check out StashAway, you might as well just use this promo code. I shared my thoughts on StashAway in a previous article, so do check that out if you’re keen.
StashAway Referral Link
1. Financial Horse (FH): The S&P500 and NASDAQ are officially in a bear market (20% decline peak to trough). What are your thoughts on this sell-off? Temporary blip, or signs of something bigger to come?
StashAway: The rapid and big rebounds at the last trading few days of 2018 have lifted these indices from the 20% correction zone. So by the 20% metric, these markets are not in bear markets.
But let’s look at the characteristics of corrections vs bear markets in more detail:
- Corrections are rapid and unexpected declines in the stock market of between 10% and 19.9% and can be quite common during good economic times. They take an average of 5 months to find a bottom and an average of 4 months to recover from the bottom (see table below).
- Bear markets, on the contrary, evolves gradually and are usually driven by significant deterioration in economic conditions.
As your readers know, we believe that long-term investors should look at the economy when assessing their portfolios. We approach this topic the same way: we prefer to look at whether these market declines are accompanied by deterioration in the economy. If not, there are more likely to be market corrections.
Over the last 18 years, we have witnessed two major bear markets for equities. The first bear market took place after the bursting of the US technology bubble (March to October 2000), when the Nasdaq Composite and the S&P 500 declined by around 78.4% and 49.3%, respectively. The other bear market happened during the housing market crisis of 2008. During that time, the S&P 500 declined by around 57.7% between November 2007 and March 2009.
In both cases, the rates of change in economic numbers such as industrial production have rapidly declined into negative territory. At present, this is not the case with the US economy. For other economies such as China, the Stock Composite has declined by around 25% in 2018. True that Chinese growth has slowed but not in recession territory either.
We do not try to predict the future, we prefer to be systematic in our response to actual, hard data. As of today, the World is still showing positive economic data, hence we look at asset allocation with this in mind. We are keeping a close eye on how numbers develop and we are ready to make changes quickly if needed, always looking at data and always adopting a systematic view, making sure human bias do not have a place in ERAA’s decision making process.
2. FH: What are your thoughts on financial markets in 2019? Is this going to get worse before it gets better? Or is the worst already behind us?
The following are key points from our latest CIO Insights, our monthly newsletter:
- In 2019, political and trade drama will probably continue to generate short-term noise in the markets, but economic trends (not market ups and downs) ultimately determine medium and long-term returns.
- Inflation-adjusted growth in the US continues to perform better than the global aggregate. This means that investors should continue to invest internationally and will need a sufficient amount of US-based assets to enhance the staying power of their portfolios.
- It is important to keep in mind that portfolios should continue to be diversified and have a sufficient amount of protective assets, such as US government bonds, high quality corporate bonds and gold. The slower expected pace of rate hikes helps these protective assets function more effectively as shock absorbers for a portfolio.
The complete CIO insight can be found here: https://www.stashaway.sg/r/reviewing-2018-and-anticipating-2019
3. FH: What would your advice be to a StashAway investor? Should they continue to hold, to dollar cost average, or to exit completely?
Excerpt from the last section of our CIO Insights:
The most important thing to navigate volatile markets is to stick to your long-term plan. Don’t try to time the market, but rather, invest systematically (e.g., monthly) through standing instructions, and confirm that the risk level you have chosen is right for you and does not disturb your sleep! How can you stick to your plan? Ignore the media and maintain a long-term mindset.
- Ignore the media. If it’s up to the media, there will always be an endless list of things to worry about. Maybe 2019 will be a good year for growth-oriented assets. Maybe not. Maybe market volatility will continue to stay at similar levels as 2018. Maybe not. Maybe Trump is going to be impeached in 2019. Maybe not. The thing to remember as we enter the new year is that none of these worries are new. They have been talked about before and have always been there, and will stay.
- Maintain a long-term mindset. As long as you have a long-term mindset, and your risk level is set correctly, short-term volatility is not something that should worry you. If it does bother you, then the risk you’re taking is too high. The beauty of advanced investment technology is that it is easy to review and edit your investment goals. The less beautiful part is that by being able to check our performance on any particular day, we can forget to look at the bigger picture: how much risk we’re taking to reach our returns as we navigate the same volatile market that the rest of the world is also navigating.
As long-term investors, we should continue to focus on economic data and not allow hearsays and naysay derail us from our investment plans.
4. FH: StashAway uses an Economic Regime-based Asset Allocation™ (ERAA) that is designed to manage risk-reward across all economic conditions. How did the ERAA respond in the days leading up to the current bear market? What is the ERAA predicting going forward (12 to 24 months)?
There are 3 pillars in ERAA: (1) identify the economic regime and optimize portfolios accordingly; (2) switch to all-weather strategy when economic numbers are unclear and (3) take into account the valuation of assets vs the economy.
As the economic numbers continue to point to disinflationary growth (albeit slower rate of growth), there was no economic reason for ERAA to respond in December 2018. As mentioned earlier, market corrections are rapid and investors are not meant to react and get whipsaw by the price swing. Investors are better served by setting the risk right and have a dollar cost averaging investment plan designed for long-term success.
Having said that, ERAA monitors (3) above on an ongoing basis and when valuation gaps are wide enough, ERAA would re-optimize portfolios to take advantage of distorted market valuations vs economic factors.
Please refer to our answers in Q2 to get our response on “looking forward the next 12-24 months”.
5. FH: Did StashAway perform any rebalancing of portfolios during the recent market sell-off? If yes, did it reduce the losses? If not, why not?
At StashAway we differentiate “rebalancing” vs “reoptimization”.
- Rebalancing is about returning asset allocations back to target. When a particular asset declines a lot versus other assets in the portfolio, its market-value weight (allocation) in the portfolio also drops below target. This would trigger a rebalancing where the algorithm buys more of the underperforming asset funded by selling the other higher valued assets in the portfolio. StashAway’s systems check all customers’ portfolios daily and trigger a rebalancing any time any of the asset classes in any client portfolio is not on target by a certain threashold. The pure rebalancing action of selling one overweighted asset class to buy an underweighted one may happen very rarely, as StashAway’s systems actually perform use a rebalacing logic any time there is a cash flow, being it a dividend, a new deposit or a withdrawal, helping to maintain portfolios balanced even without triggering a full rebalancing. It is possible that in the month of December a few customers that have not had any cash flow in their portfolios for some time may have seen rebalancing.
- Reoptimization is about changing the target asset allocation, following the 3 pillars mentioned in answer 4. We did not trigger any change in the target asset allocation. As mentioned earlier, the economy is still in “disinflationary growth” regime, the “risk shield” has not been triggered and changes in relative valuation have not yet been material enough to trigger a change in target asset allocation.
6. FH: As a general note, are you satisfied with StashAway’s balanced portfolios and how they responded to the current bear market?
Our goal is to deliver high quality risk-adjusted performance over the long-term. It is therefore difficult to assess a 1 or 3 months performance of portfolios: we do not focus on any short-term single-period metric as we do not think this is the right approach to investing.
However, let us try to give you some colour. StashAway’s portfolios diversification has helped portfolio being resilient during the recent volatility, limiting losses across risk levels. Our portfolio’s exposure to protective asset classes such as Long-term Government bonds (TLT), Medium-term Govt Bonds (TLH), and Gold (GLD) have helped counter the losses of the more growth-oriented asset classes; TLT, TLH and GLD in the last 2 calendar months have returned respectively 7.7%, 5.6% and 4.0%.
Nevertheless, we continue to strive for further innovations to keep delivering the best service for investors. In that regard, we are never satisfied and you can rest assured we are looking at ways to offer our customers more options to help them build their wealth in the long term!
7. FH: StashAway’s portfolios are heavily weighted towards the US markets. Would you consider a greater allocation to Asian or European markets after the recent US sell-off?
StashAway’s portfolios are global, and include exposure to US assets as well as other geographies. Please note that although StashAway uses US-listed ETFs to track asset classes around the world, it doesn’t mean that we are 100% invested in US-based assets (e.g., when we invest in US-listed ETF EWJ, we are investing in Japanese stocks and are taking exposure to Japanese equities, not US).
You are right that our current allocations have a significant exposure to the US. This is a decision driven by ERAA’s monitoring of economic data and can change over time with changes in economic conditions. As it currently stands, ERAA continues to see stronger inflation-adjusted growth in the US than the global aggregate. This means that ERAA continues to invest internationally but will maintain a sufficient amount of US-based assets to enhance the staying power of their portfolios.
Going forward, ERAA would tweak the geographical allocation as and when the rates of change in the economic numbers in other regions such as Asia or Europe improves relative to the US.
Additionally, for each region, ERAA would consider market valuations vs the respective economic factors. For example, if Asian economic growth is improving but Asian equities are still relatively undervalued vs the economic numbers, ERAA would raise the expected returns of Asian Equities and hence increase allocations.
8. FH: A couple of readers have reached out with stories of how they opened an account last month and are down by double digit losses. What is your advice to such an investor?
No customer should have double digit losses when looking at returns linearly. Our platform shows “money-weighted” returns which in short period of time can swing to higher figures: we show money-weighted returns as most of our customers invest systematically (e.g., monthly), and linear returns fail to capture the actual returns of portfolios over time.
Now, irrespective of whether customers have made single or double digit losses, our advice to investors is always to stick to your plan and look at the long term. Investors should avoid looking at 1 or 2 months (or even 12 months) returns when trying to build a 30-years retirement plan or a 15-years kids’ university fund! For people in the early part of their “investment career”, a reduction in prices is actually good news: a dollar-cost-average strategy would enable to buy securities at a discount, therefore enabling higher long-term returns.
9. FH: Given that StashAway’s portolios are down in the current sell-off, would you consider waiving some AUM fees for alignment of interests with investors?
No, we are not considering waiving fees as we do not think this would be healthy. StashAway’s mission is to empower people to build their wealth in the long term, and it would not make sense to tie our revenue structure to short term fluctuations in the markets. We believe that our fee structure makes our interests fully aligned with our customers: our revenues grow as our customers entrust us with more assets.
We are very proud of how low our fees are, and we have build the company making sure that we will be able to sustain such low fees. When we launched StashAway, we have decided to only charge a “management fee” linked to assets under management, and not to have “performance fees” linked to investment performance; the reason for this decision is that performance fees would misalign StashAway’s and customers’ interests as they would inherently incentivize StashAway to take more risk: with more risk, fees would increase in good markets and would not change when markets are down, leaving StashAway with more revenues and customers with more volatility.
10. FH: Do you have anything that you want to say to StashAway’s investors? I know there are quite a few of them that frequent Financial Horse.
For many of us, the start of a new year is a great opportunity to assess whether we’re on track to meet the financial goals we’ve set for ourselves. It may sound tedious to sit down and do, but the results of setting up an automated monthly investment plan can be the difference between retiring at 60 instead of 65, and living the golden years the way we have dreamed of, or not! A plan is the difference between a dream and a goal.
2018 has been very volatile for most markets. This should not make people change their investment plans. The secret to successful investing is to be systematic and stay true to one’s plan over time through ups and downs. Particularly for people that are in the early part of their investing “career” (i.e., less than 45-50 years old), a steep re-price, such as the one we are witnessing, is probably good news when you consider how they’ll benefit in the future from this: now, they can buy securities at a discount, therefore increasing long-term returns. In the short term, seeing red in anyone’s account hurts, but no one should let emotions stop them from following their plan.
I wrote an email to our customers at the end of the year suggesting the following 3-steps approach to beginning-of-the-year planning:
#1: Clarify your top 3 goals, and calculate how much money is required to reach them
It’s great if you’re saving every year and your net worth is increasing, but that doesn’t mean that you’re necessarily on track to reaching your goals. It’s crucial that you identify what you want to achieve, when you want to achieve it, and how much it will cost you (e.g., retire in 2045 with $10,000 in monthly income for 30 years). From there, you can build a monthly savings and investing plan to get there. If you want to check how much money you need to save (and invest) each month to reach your particular goals, you can do so through the StashAway mobile and desktop apps.
#2: Set up an automated plan to invest extra cash (including your SRS account!)
Saving is great, but it’s only the first step. You will not be able to reach your goals comfortably if you put your money under the pillow (or in a savings account).
If you save $1,000/month for 30 years and you put that under the pillow, after 30 years you will have about $360,000. Sounds like a good amount. But, if you invest those $1,000/month and earn 6% per annum, after 30 years you could have more than $1,000,000: $360,000 from your savings, $640,000 from investment returns! Yes: investing is very important, particularly to reach the more distant and larger goals!
#3: Set up a standing instruction to your investment portfolios, and make sure you’re comfortable with the risk you’re taking!
2018 was a rocky year for financial markets across the world, and it’s possible that some of your investments (with StashAway or elsewhere) have underperformed your target returns, or even lost money. This isn’t reason to panic: investing requires a long-term mindset, because in the short term there will most certainly be some ups and down: the more risk you take, the more pronounced the ups and downs. The secrets to successful investing is being systematic and staying true to your plans even through those market ups and downs. If the swings are too high and you feel you should sell and move back your money under the pillow, the truth is that you’ve probably taken on too much risk in the first place. Adjust your risk exposure to a level which you can stomach in both the short term and long term. Taking too much risk will push you to make the wrong decisions in the short term, such as investing less or withdrawing when the markets go down and more when the markets go up: when the markets are down you’ll actually be making the best investments, as you’re buying securities “on sale”! With the right risk level, it’ll be easier to stick to a long-term investing plan; future-you will be very happy with you in 10-20 years, and will reap the benefits of your patience in building your wealth.
11. FH: Ultimately, we are all investors here, united by our love for investing and financial markets. Do you have any final note to Singapore investors on investing in 2019?
The StashAway team wants to take this opportunity to thank fellow investors like Financial Horse readers for taking the journey with us. Looking ahead, we are personally very excited about the stream of innovations the StashAway team has in store for you and how they will further enhance the way you make the most of your investments in 2019 and beyond.
Till next time, Financial Horse, signing out!
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“When we launched StashAway, we have decided to only charge a “management fee” linked to assets under management, and not to have “performance fees” linked to investment performance; the reason for this decision is that performance fees would misalign StashAway’s and customers’ interests as they would inherently incentivize StashAway to take more risk: with more risk, fees would increase in good markets and would not change when markets are down, leaving StashAway with more revenues and customers with more volatility.”
Wouldn’t management fee alone misalign interests too? Think having high watermark and fees are only charged above high watermark should align more
Well I don’t speak for StashAway on this, but ultimately StashAway is a business as well. If they only charge fees above a high watermark, it would make their earnings highly dependant on the market, which is not a good business model (lumpy earnings). Not only that, but StashAway is supposed to be a passive asset allocation tool that isn’t intended to outperform the market, so they’re actually supposed to get market level returns.
As an investor though, I absolutely agree that your idea works well for us. Although a company that implements such a fee structure may not be around for long! 😉