Computerized Trading Risks

The new autopilot in my airplane is an amazing piece of technology. It can navigate a detailed flight plan with precision no human could replicate. Even when turned off, it quietly monitors the flight and intercedes if the airplane enters an unsafe attitude. If a pilot completely took their hands off the controls, as the plane varied from its safe course the autopilot would wake up and take over.

While being trained on the features of this autopilot my instructor told me my biggest risk would be if I trusted it too much. He said, “Never take this system into any flight conditions you are not qualified to handle without it.” He reminded me an autopilot is only as good as the data it receives, and the responses that are programmed into it. It cannot think creatively. If the data is flawed, or the conditions are outside pre-set parameters, it will give a brief aural warning and then disengage. In aviation we call this the “it’s your plane” moment. This moment almost always happens at the most inconvenient time.

The autopilot does a wonderful job in calm weather. It handles the routine task of flying, allowing the pilot to focus on trip planning, communicating with ATC and resting. It’s also very useful in low visibility conditions because it doesn’t get disoriented. But if the data flowing to it is faulty, or the flight conditions are outside its programmed parameters, for safety reasons it hands the plane back to the pilot. The most common reason would be very rough air.

Investing firms offer their own autopilots. Like the ones in planes, these computers handle many of the routine tasks of investing. They do research, make decisions, and execute trades much faster than a human could. This frees up investor time and resources. But as in an airplane, if you let a computer manage your investing in an environment you are not qualified to be in, you may be setting yourself up for trouble. Computers are great at math and at following their programming, but they cannot think creatively. No computer can see a tragedy in the news and anticipate how it might affect your investments. They tend to react to data rather than anticipate it. They don’t see fires burning, wars being threatened and diseases spreading. They only see the numerical results of those events and react based on their programming. This means that like an autopilot, their best performance is most likely to happen when events transpire in a predictable fashion.

You, or your advisor, may find advantage in utilizing computerized investing systems for routine tasks, but someone who is current in investing knowledge and skills needs to be paying careful attention. If you allow that investing autopilot to take you into conditions you couldn’t handle without it, one day it may suddenly hand the controls over to you at the most inconvenient time. As a pilot who has had that happen in a plane on several occasions, you’d better be ready.