Also, what are your feelings about various robo advisors like Wealthfront and Betterment and the competing products that Schwab and Vanguard have out now?
Say you have Fund A and Fund B set to automatically invest 50/50 your $100 dollar contribution bi-weekly, with a buy commission of $5. You pay buy commissions on fund A and B 4 total times a month, so you've wasted 10% of your monthly investment ability ($200 - $20). In a year that money is $194 at 8%. (This used to be the case with old ShareBuilder/ING/Capital One---not sure about the new-style other brokers)
Consider a monthly payment to Fund A and two weeks later a monthly payment to Fund B. You saved half commission cost of above, and in a year your return is ~$205.
Robo Advisors like Wealthfront are still just advisors, and that means they're just guessing like real-life advisors. And as has been proven time and again, they underperform index funds.
* http://www.investopedia.com/articles/investing/060216/3-reas... * http://finance.yahoo.com/news/buffett-most-mportant-investme...
Tax loss harvesting is limited to 3000 per year, but you can carry over until you've exhausted the losses.
Of course TLH is only good if you're in a taxable account with them.
I also don't buy it being easy- particularly with trying to avoid the pitfalls of wash sales and the paperwork to actually claim it.
Typical brokerages can do that too :-).
> rebalance automatically
The value of which is maybe dubious, as pointed out elsewhere in the thread. It doesn't need to be done frequently, if at all, and is pretty trivial with a simple 3-fund portfolio.
> Tax loss harvesting is limited to 3000 per year, but you can carry over until you've exhausted the losses.
Right. But you only get so many working years.
> Of course TLH is only good if you're in a taxable account with them.
> I also don't buy it being easy- particularly with trying to avoid the pitfalls of wash sales and the paperwork to actually claim it.
You need to be aware of how wash sales work even if you use a robo-advisor to do the TLH. You need to be sure you don't have substantially equivalent securities in your IRAs and 401(k), etc. The actual mechanic is pretty easy — sell one index fund (with shares held over 30 days), buy another extremely similar index (but not the exact same index).
As far as the paperwork — it's imported automatically with Turbotax etc and is exactly the same paperwork as is needed for capital gains.
TLH is also only good while you're working. If you have enough TLH saved up to cover the rest of your working years at $3k/year, you can stop paying the robo-advisor premium.
I'm sure there are people that are heavily invested in long duration bonds that do not understand how much interest rate risk they are taking.
Its a little different from a Robo advisor, but I'd probably pay 0.05%+ (5 basis points) annually to know my factor exposures.
I am likely exposed to factors that I am not even aware of.
Hmm. Citation needed. They've barely been letting people invest long enough for that to be "proven" once, let alone "time and again".
I don't believe said evidence exists, here's why.
First, the robo advisors distribute your money directly against and amongst several index funds.
Second, the money-saving benefits robo advisors provide that direct indexing doesn't, like very frequent automatic rebalancing and automated (aggressive) tax-loss harvesting.
Third, the ability to diversify any amount of money. You can put $1k into Wealthfront and diversify across five Vanguard index funds. But directly on Vanguard, this is impossible because the minimum investment in most Vanguard funds is $3k [0].
With that, take their Total Stock Market Index Fund as an example. If you can only invest $3k in it, your expense ratio is 0.16% [1]. If you can invest $10k in it, your expense ratio is 0.05% [2]. Through Wealthfront, I can hold the VTI ETF at 0.05% expense ratio, which I don't have to pay directly, only indirectly out of the standard Wealthfront fees.
The best possible claim I can imagine then is that for very large accounts, excluding tax-loss harvesting benefits and any benefits of rebalancing, it is cheaper to index invest — for example, if you have a $100k account and can spend less than $225 worth of your time [4] in the entire year keeping up on it, rebalancing if you wish, etc., then in some cases you could beat the robos. The tradeoff of going direct is arguably not free though. I also don't believe this level of investment applies to most people, at least most Americans.
In fact, for accounts under $10k, the Wealthfront fee is zero. I can't think of a good reason why everyone shouldn't take advantage of that.
[0]: https://investor.vanguard.com/mutual-funds/fees
[1]: https://personal.vanguard.com/us/funds/snapshot?FundId=0085&...
[2]: https://personal.vanguard.com/us/funds/snapshot?FundId=0585&...
[3]: https://personal.vanguard.com/us/FundsSnapshot?FundId=0970&F...
Well, they charge additional fees. They have to make that up somewhere or it's the same (but at higher cost) as buying the indices directly.
> very frequent automatic rebalancing
This actually costs money and doesn't improve outcomes. Scroll to "study for the NYTimes on rebalancing" on http://johncbogle.com/wordpress/category/ask-jack/ . Or http://www.morningstar.com/cover/videocenter.aspx?id=615379 .
> automated (aggressive) tax-loss harvesting
Tax-loss harvesting has very limited benefit. Mostly you can offset income. But it's only $3k/year. You can harvest enough losses by hand to easily take the $3,000 deduction too.
> Third, the ability to diversify any amount of money. You can put $1k into Wealthfront and diversify across five Vanguard index funds. But directly on Vanguard, this is impossible because the minimum investment in most Vanguard funds is $3k.
No... you can buy the same Vanguard ETFs with no minimum.
> With that, take their Total Stock Market Index Fund as an example. If you can only invest $3k in it, your expense ratio is 0.16% [1]. If you can invest $10k in it, your expense ratio is 0.05% [2]. Through Wealthfront, I can hold the VTI ETF at 0.05% expense ratio
You can just buy VTI as an individual. You still get the 0.05% rate.
> The best possible claim I can imagine then is that for very large accounts, excluding tax-loss harvesting benefits and any benefits of rebalancing, it is cheaper to index invest — for example, if you have a $100k account and can spend less than $225 worth of your time [4] in the entire year keeping up on it, rebalancing if you wish, etc., then in some cases you could beat the robos.
Yeah. Reducing expenses is the goal.
I feel like you may have overlooked some of the nuances in my answer, because I've already specifically pointed out how the robo advisors can be cheaper than buying the indexes directly for a lot of people.
If that's what you think, you've missed some of my post :-). Specifically, I said:
> you can buy the same Vanguard ETFs with no minimum.
As an individual you can get 0.05% VTI directly from Vanguard. No $3k minimum (minimums are a mutual fund thing).