When investing for the long term, received wisdom suggests you should work out how much risk you’re willing to take, build a portfolio accordingly and then leave it alone.
Of course you should check in every few months to make sure your investments still align with your priorities, but few would suggest you meddle on a daily basis.
After all, buying and selling can get expensive and creates greater opportunity for emotion to get in the way, which could see you sell at the wrong time out of fear or buy out of irrational exuberance.
So a new investing platform called Exo Investing launched today feels in some ways counterintuitive – it rebalances your portfolio every day, buying and selling depending on what the markets do.
But its founders believe that it works because it has one clear difference to other modes of investing: daily investment decisions are made by algorithms, not humans.
Portfolio planning: How Exo appears on mobile and desktop
How does it work?
When setting up your portfolio Exo asks you a series of questions online designed to tease out your risk profile.
These include looking at how long you are investing for and how you’d feel if your investments saw drops of the magnitude seen in the 2008 financial crisis.
In general the greater the risks you are happy to take, the greater the returns you could achieve – but equally the more your portfolio could drop in value in the event of a downturn.
Those investing for longer are usually in a better position to up their risks because they’ve got time to ride out any big falls. Investors with plenty of funds also tend to be able to take on more risk, just because it’s less disastrous if they lose a lot.
You are then asked what types of things you’d like to invest in – be it emerging markets, UK stocks, property, etc. You can also choose not to have any input at all.
The platform’s algorithm then gets to work, putting together a portfolio based on your risk profile and preferences.
It allocates your money into a number of different ETFs or exchange-traded funds, essentially passive funds that move up and down with stock markets and indices worldwide.
It doesn’t pick individual shares, nor put your money into funds where a person has chosen a group of companies to invest in. Instead it is all automated, which tends to be a low-cost option because you’re not paying for human expertise.
Then comes the bit that makes it different from most other investing platforms. As the markets move about on a daily basis, so do your investments in line with these changes.
The argument is that that when you set your portfolio, your investments perfectly match your objectives and risk profile – but that from one day to the next the value of investments rise and fall and if you don’t move about your money as well it can lead to misalignments.
So the algorithms get to work every day to make sure your portfolio is set as accurately as it was the day you first set it up.
Keeping things balance: Exo manages your investments for you on a daily basis
You may wonder why this is necessary; after all creating a risk profile is not an exact science and is sufficiently open to interpretation that a number of different portfolios could comply with a single risk profile.
However, over time things can diverge considerably. Chief operating officer Nikolai Hack explains that it really comes into its own when the market moves dramatically.
The algorithms should protect you from the biggest bumps because you are quickly and automatically moved into safer assets when things become riskier.
It means you will never benefit from the biggest market rises as you won’t be quickly buying when markets are low but more likely sheltering from high volatility, but equally you may not get as badly stung in the event of a downturn if the algorithm is automatically on the case buying you into safer options.
Launch: Chief operating office Nikolai Hack and chief executive Lennart Asshoff
How does it compare to other options out there?
The technology behind Exo has been around for a while. It has been developed by large Madrid-based asset manager ETS, which is also a major shareholder in Exo, over the last 30 years.
Until now the technology has been supplied to big, institutional investors and private banks such as Rothschilds for their wealthiest clients.
However, the computing power and technology is now available to make it possible to supply the same product to individuals.
There has been a proliferation of investing platforms in recent years due to the same advances in computing power and technology.
There is a full spectrum of investing platform options depending on the level of involvement investors want. Some don’t worry you with what you’re investing in, but rather ask you a few questions about risk and then put your cash straight in one of a handful of prepackaged portfolios.
Others will suggest funds depending on what you’re hoping to achieve, or let you hand pick funds from a range of several hundreds. At the other end of the spectrum, some platforms will allow you to pick individual shares as well as funds to build your own portfolio.
Exo appears to sit somewhere in the middle. It allows you to have some say about the types of things you invest in, but once you’ve made those decisions, it is its algorithms and not you that makes daily decisions about what you swap in and out of.
This is not a product for someone who likes to do their own research and legwork and get very actively involved in their investments. However, for someone who doesn’t like to get bogged down in the minutiae but does like to have a say, it could work.
Who is it for?
While Exo is targeting ordinary investors and sees the project as a way of ‘democratising’ investing, it still requires you to have £10,000 to hand to get started. Many of the other platforms will let you get going with just £50.
As with any investing, it doesn’t tend to make sense to get started with funds you might need within the next three to five years, nor to invest money you wouldn’t manage if you lost a part of.
There is an annual fee of 0.75 per cent on investments up to £100,000 and 0.5 per cent on large amounts. There is also an annual fee for the ETFs chosen, on average 0.25 per cent.
This is roughly in line with other robo-advisors, which also set portfolios of passive funds but that do not offer personally-tuned advice from humans.