download (27)I have written extensively about this new robo-advising trend that is sweeping across the investing world (see here and here), but realize that this concept can be challenging for students to grasp. Fortunately, there is a simulation that help students see first-hand how this works. Frankly, after you have had a chance to try out this tool you might feel like this is more an example of algorithmic investing (rules-based investing based on your risk tolerance and age) rather than robo-advising.

So, here’s the link to the Wealthfront website to get started. Click on the INVEST WITH WEALTHFRONT button and proceed to answer seven questions about:

  • Investment goals
  • Age
  • Pre-tax income (students will need to put in at least $1 even if they don’t have part-time job)
  • Household description
  • Value of cash and current investments
  • Purpose of investing
  • Risk tolerance question (if the stock market drops…)

Answer that 7th question and voila, the robot (or algorithm) spits out a recommended asset allocation complete with specific securities selected (website will ask for your email address, you can close that window without inputting your email address to see your asset allocation). Here’s an example:

Screen Shot 2016-06-10 at 11.08.04 AM

What makes for an even more interesting discussion is the page that appears when you click on “See more details” on the lower left:

Screen Shot 2016-06-10 at 11.09.39 AM

Some questions for your students:

  • What are the stock funds they recommended?
  • What percentage of your overall portfolio will be made up of stocks?
  • What factors do you think led them to recommend this percentage in stocks (I assumed 18 year old for the sake of this analysis)?
  • What happens to their stock recommendations as you toggle the risk tolerance dial?
  • Why do you think Natural Resources are included? Seems like a strange investment.
  • Why are they recommending primarily Vanguard funds?
  • What are the fees associated with this strategy (see the Your Costs tab on the bottom chart)?
  • What is the probability that a portfolio like this would lose money over a five year period (see Projected Performance chart)?
  • What do you think are the pros/cons of using a Robo-advisor? Do you trust their approach? Why or why not?