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How To: Create a DIY Robo-Advisor

by Apoorv Trivedi on
How to

The Bottom Line

The Rebalance Portfolio tool on Interactive Brokers’ TWS platform makes it simple to top-up and rebalance portfolios with many securities. This can allow you to cheaply create a DIY Robo-Advisor, saving hundreds or even thousands of dollars a year, on larger portfolios.

However this approach requires a lot of discipline and has its risks. It is not suitable for most investors including those with small portfolios (<S$30K or so), where it can be costlier too.


How to create a DIY Robo-Advisor?

In our review of Interactive Brokers we discovered a cool feature on their Trader Workstation (TWS) platform, called Rebalance Portfolio.

This tool lets you to specify target weights for all the stocks in your portfolio and automagically generates all the trades needed to achieve those weights. This is one of those simple yet brilliant features that makes you ask, why doesn’t anyone else have this? We did not see a similar tool offered by any other broker in Singapore.

This feature can make it trivial to conduct a periodic rebalance of your stock & ETF portfolio.

This is useful if you just want to keep the portfolio weights aligned with your objectives with an year-end rebalance. But that is not all. It also lets you top up your portfolio without changing the mix of stocks & ETFs in it – a DIY recurring investment option.

Lets take a simple example. Say you create a portfolio of 20 stocks as an equally weighted basket so that each stock has a 5% allocation in the portfolio at the beginning of the year. Lets say you start the year with a S$100K portfolio and the value increases to S$106.7K by end of March. You decide to top up the portfolio by S$13.3K to a total of S$120K.

Doing this so the portfolio stays equally weighted, without a rebalancing tool, would be a nightmare.

Because of share price movements, the weights of each security would have drifted from the original 5%. So you need to figure out how much of each stock do you need to buy or sell to end up with a S$6K position in each stock (S$120K target portfolio / 20 stocks) and then input all those orders with your broker.

But this is likely to result in a lot of small orders which will all quite likely hit the minimum commission levels at your broker. All this can make portfolio rebalancing or recurring top ups quite  painful and expensive.

The “Rebalance Portfolio” feature changes that. No more data entry in the spreadsheet to calculate order sizes for each stock and no more manual order entry.

Simply fund your account with the additional S$13.3K, set target weight of all 20 stocks to 5%, cash to 0% and press “Create Rebalance Orders”. The system will create 20 orders (Buy or Sell, as needed) that will bring each securities weight in the overall portfolio to 5%.

Verify all the orders and press “Transmit All” to execute the orders. Voila! Your portfolio is topped up and rebalanced.


Could be better

Pressing “Create Rebalance Orders”, in our example above, creates 20 Limit orders, which means you need to either enter 20 limit prices or change 20 orders types from Limit to Market or some other order type. In the millions of settings on TWS (you can change the text and color of the “Import” button!), there is no setting that we could find to change the default order type.

To be fair to IB, this is the safer design choice but a more efficient option for people who are comfortable at this level would have been good to have.


Why bother?

Because it can save you a lot of money.

In our analysis of Robo-advisors, we found that if you invest a lumpsum of S$50K with a Robo-advisor and earn a return of 7.5% per year, over 15 years you will pay a total fee between S$8.5K to S$25.7K, depending on the Robo you choose.

If, instead, you create a portfolio with 20 ETFs on Interactive Brokers and rebalance it quarterly for 15 years, earning the same 7.5% per year, the total fee paid is only S$4.3K i.e. less than half of the cheapest options.

Of course, this requires you to invest a fair bit of time and there is a cost to that. Assuming you spend 2 hours understanding the Rebalance Portfolio tool and setting it up, and then 1 hour rebalancing every quarter, over 15 years that works out to a total of 62 hours spent managing the portfolio.

In that case you’re getting paid roughly S$68 an hour.

Against a slightly more expensive Robo and a larger initial portfolio (or regular top ups), your hourly rate can go up a lot.

Using Rebalance Portfolio tool for a S$250K portfolio against an mid-priced Robo (rather than the cheapest one), results in an hourly rate of S$580 per hour and total savings of S$36K!


Are you sure?

Somewhat.

But this is not investment advice. Do not try this at home. Also make sure you read the next section.

To test this feature, we created a simple, all-in-one global portfolio using 6 ETFs based loosely on this article.

We back tested the performance of this portfolio over last 5 years using the brilliant Portfolio Visualizer. We used US listed ETFs for this exercise because Portfolio Visualizer only works with US listed securities. Since most Robos in Singapore also use only US listed ETFs for portfolio construction, this is fine.

ETF Name Weight
VTI Vanguard Total Stock Market ETF 42%
VXUS Vanguard Total International Stock ETF 28%
IUSB iShares Core Total USD Bond Market ETF 12%
BNDX Vanguard Total International Bond ETF 8%
SCHH Schwab US REIT ETF 5%
GLD SPDR Gold Shares 5%

We created a portfolio with 70% equity exposure (of which, 60% US and 40% Rest of the World), 20% Fixed Income (again 60% US) and 5% each in Gold and US REITs. Again this is not investment advice.

We compared the 5 year performance of this portfolio against the self-reported numbers provided by various Robos. We chose the numbers for a portfolio at each Robo that seemed most similar to this portfolio in asset allocation.

We also calculated the total cost of in creating this portfolio and doing quarterly rebalances on the IB platform and compared that to the total cost on Robos.

We were pleasantly surprised. Not investment advice!

Comparing cost of DIY Robo Portfolio vs. Actual Robos
Comparing the cost & performance of DIY Robo vs. Actual Robo-Advisors. Past performance is not indicative of future results.

We also ran the same analysis for a more complex 17 ETF portfolio.

Finally we have implemented the simple, 6 ETF portfolio on IB account for a sum of US$10K, using the Rebalance Portfolio tool. We will test out the top up and rebalance features over the next few weeks and update this article.

Its worth pointing out that the savings can be less meaningful for smaller portfolios since the minimum commission per trade has a larger impact on the overall cost. For the S$10K portfolio, we switched to semi annual rebalancing and top ups to reduce costs.

Rebalance Portfolio: Menu
Creating a portfolio with Rebalance Portfolio: Finding the Tool
Rebalance Portfolio: Search in menu
Creating a portfolio with Rebalance Portfolio: Finding the tool faster
Rebalance Portfolio: Start
Creating a portfolio with Rebalance Portfolio: Start
Rebalance Portfolio: Enter Tickers
Creating a portfolio with Rebalance Portfolio: Enter the tickers
Rebalance Portfolio: Enter Target Weights
Creating a portfolio with Rebalance Portfolio: Enter the target weights
Rebalance Portfolio: Create Rebalance Orders
Creating a portfolio with Rebalance Portfolio: Create orders

Is this for me?

Probably not.

Most people are probably better off with a simpler approach like Robos.

As many experts point out, time in the market is a lot more important than timing the market. Time in the market is also more important than reducing the fee you pay.

Not everyone has the discipline needed to run a DIY Robo with monthly top-ups and quarterly or even annual rebalancing. A number of Robos allow you to set up recurring investment plans, which can automatically pull a set amount from your bank account and invest it the portfolio you choose.

This approach is much more likely to maximize the time in market for your money.

We, at moolahgeeks, also believe a passive investing approach is appropriate for most investors. Passive isn’t simply about following a set asset allocation and using index ETFs. Its also about not letting market gyrations influence the timing or amount of your regular investments in the market.

Those implementing a DIY Robo are much more likely to get swayed by market movements and “adjust” their strategy, most likely leading to underperformance.

There are other risks too.

Entering limit prices on 10 or 20 stocks, 12 times or 4time or even once a year is setting yourself up to make a mistake. It can be very stressful.

This approach also does not work for small portfolios whereas on many Robos, including our pick, Endowus, you can start investing cheaply for as little as S$100. The cost of maintaining smaller portfolios on a DIY basis can be much higher.

Finally, you also cannot invest your CPF funds using this approach. Ability to invest CPF funds cheaply is the single biggest reason why Endowus is our pick for the best Robo in Singapore.


So why are you writing about this?

Because we are geeks. And because it’s a cool feature. And who knows, maybe one day IB will automate some more and make this an even more user friendly feature.

But for now, this remains one for the geeks.


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