The value of MarketRiders

By Felix Salmon
April 11, 2011
asked how much rebalancing is actually worth, in terms of basis points. I didn't get a clear empirical answer -- the responses in the comments ranged from zero to 150bp. But now Burton Malkiel, of all people, has come out against the service:

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Last year, looking at MarketRiders, I asked how much rebalancing is actually worth, in terms of basis points. I didn’t get a clear empirical answer — the responses in the comments ranged from zero to 150bp. But now Burton Malkiel, of all people, has come out against the service:

Investors could save more money on their investments and improve their returns by skipping services such as MarketRiders and making decisions themselves, said Burton Malkiel, professor of economics at Princeton University and author of “A Random Walk Down Wall Street.” The 10th edition of the book was published in January.

He recommends investors hold a mix of the Vanguard Total World Stock Index exchange-traded fund and a broad-market bond exchange-traded fund such as the iShares Barclays Aggregate Bond Fund or the Vanguard Total Bond Market exchange-traded fund, and rebalance annually.

“I don’t want to pay 25 basis points to anybody to do that for me,” said Malkiel.

MarketRiders responded to Malkiel’s comments obliquely, on their blog, by praising Malkiel and his advice of investing in ETFs. But I think that they could have been quite a bit stronger: Malkiel’s criticism is a little bit off-base.

For one thing, MarketRiders doesn’t charge 25bp for its rebalancing service. Instead, it charges a flat $10 per month (or less if you pay annually) — which is only 25bp if you’re investing less than $50,000. And indeed even MarketRiders recommends that you simply buy a target-date fund rather than try to do clever things with rebalancing if your portfolio is under $25,000.

What’s more, the MarketRiders fee doesn’t actually come out of your investment returns at all. I know that economists like to think of money as fungible, but speaking personally I can certainly say that if I spend $10 less each month on my credit card, that is not going to mean that I save $10 more each month in my ETF portfolio.

One of the reasons that individual investment returns nearly always lag the market as a whole is simple laziness: while I’m quite sure that Burton Malkiel has the discipline to be able to rebalance his investment portfolio annually, most of us forget, or never get around to it, or let dividends pile up uninvested, or that kind of thing. Investing is a chore, and the value of MarketRiders is only partly in the rebalancing.

“The beauty of it for me is that monthly e-mail that just says ‘Here’s how to do it,’” said Cohen, who has been using MarketRiders for about two years. “If I didn’t get that e-mail I’d never do it.”

MarketRiders says that it suggests a rebalancing roughly 2-4 times per year, depending on how frequently you ask to be alerted and how volatile the market is. Personally I’d probably dial that down a bit so that the rebalancings were even less frequent, closer to Malkiel’s once per year. This is the only part of the MarketRiders business model which gives me pause: if people are paying $10 a month for a service, they want that service to do something — even when the best thing to do, most of the time, is nothing at all.

Most elegant of all, however, is the way in which MarketRiders does lots of rather complex calculations for you when you add to your savings. The screenshot looks like this:

rebalancing.png

The idea here is that rebalancing should never, or almost never, involve selling something you’ve already bought: instead, you can just put your new money into the asset classes where you’re currently underweight. Again, financial sophisticates might be able to work these sums out on their own. But in practice, there’s real value in letting an impartial algorithm do them for you — especially since the whole point of rebalancing is that you’re going to be buying beaten-down asset classes which are out of favor and therefore psychologically difficult to commit money to.

I’m still agnostic, then, on the financial value of rebalancing, as it might be expressed in basis points per year. And Malkiel might be right that the value of MarketRiders’s rebalancing advice, in dollar terms, is less than the $100 per year that it charges — especially if you’re going to be rebalancing anyway on your own. But there are other sources of value in the MarketRiders service. It encourages people to stick to their big-picture asset-allocation strategy rather than change their mind at what’s probably exactly the wrong time — and it also provides an important nudge to actually do the financial legwork that most of us love to put off until tomorrow. From a classical perspective, then, MarketRiders may or may not provide value. But from a behavioral perspective, I think it makes a lot of sense.

3 comments

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Professor Malkiel ought to be pretty familiar with the gap between investment theory and investor behavior. This is the guy who popularized the idea of stock pickers as monkeys throwing darts and advocates a two fund portfolio with annual re-balancing in the above article but has “a quarter to a third of (his) money in individual stocks and actively managed funds”.

http://online.wsj.com/article/SB12309369 2433550093.html

Posted by JohnOmeara | Report as abusive

I think you underestimate the value of laziness, and overestimate the value of accurately calculating rebalancing targets. Really, once a year is the time to start thinking about rebalancing; when you get around to actually doing it can be even less frequent. I’m sure Malkiel agrees that market-timing is a fool’s errand (at least, he says so in his book), so whenever you get around to investing is really the best time to do it. Letting sale proceeds and dividends pile up for a while isn’t really a problem (2008s happen on occasion); and if hitting your rebalancing target on the nose means you have to sell some stuff, maybe it’s better for you if you don’t get around to it right away (since 2010s happen once in a while, too).
Plus, you can enjoy life, sleep better, and be healthier overall when you limit worrying about your investments when you are interested and in the mood to do the legwork, research, and decision-making.
Let’s hear it for procrastination!

Posted by engineer27 | Report as abusive

Three years on, this is especially amusing since Malkiel is now CIO at Wealthfront, a firm which charges 25bps to rebalance your portfolio.

Posted by dv01 | Report as abusive