This is confusing and hard to fact check. Who do I believe?
I think their reasoning is sound in theory, but it strikes me as suspect that they would not allow even the option to stay fully invested for clients who would prefer to manage the cash component of their portfolio in a bank account where it can actually be spent at moments notice. And it does also strike me as a bit too convenient that their decision to remove this option from clients just happens to directly benefit Schwab's bottom line.
Their decision to compose more than half of the equity portion of their portfolio using dramatically higher-cost fundamentals ETFs from Schwab in place of using solely market cap ETFs also triggers similar warning bells for me, however sound the technical reasons for doing so might be: https://intelligent.schwab.com/public/intelligent/insights/w...
That said, I'm curious how Betterment came up with their numbers for their cash drag analysis. If cash drag on the highest end of the spectrum of a portfolio with 30% in cash is supposed to cost investors 0.56%, I'm not sure how they derived the lowest end of a portfolio with 6% in cash to be 0.38%. It seems to me Schwab might not be the only one here guilty of misleading potential clients.
Disclaimer: I am a Schwab client, but am not actively using their Intelligent Portfolios offering. I have done a bit of research into it back when it was announced though.
They'll keep you in some fund paying 1 bps and turn around and invest it elsewhere. Yes, you want some cash (esp. to the extent it's part of your asset allocation), but no you don't want to use the awful sweep vehicles they default you to.
Vanguard is a mutual company; they exist for the benefit of their users. Hard to compete against that.
Disclaimer: moved from Betterment to Vanguard
Those fees were on top of the ETF fees for the funds they assembled your portfolio with.
However, all of the things Betterment does for you now would be your responsibility, including asset selection, rebalancing, thinking about how to manage taxes, etc.
The bottom line is that you can do this yourself for less money, but you have to do it all yourself. Betterment offers more convenience for a higher fee.
I disagree with some of the Boglehead stuff, but the wiki is a good resource.
You don't need to do any trial and error. You just need to pick some funds and hold onto them for a long time. The funds Betterment has already picked for you are probably pretty good.
(In fairness, they do some other stuff which is more value-added like TLH, which is more work to do yourself, but again, it's hard to justify the 0.25%.)
"If You Can" by William Berstein is a good, short ebook on this subject.
I got the Wealthfront pitch when I started with my employer, but I feel much better with my current arrangement. Your comment "I have very little choice but to stay put" is never nice to hear in any context, so I hope you can move along from that place.
http://www.cnbc.com/2015/06/16/is-your-advisor-a-fiduciary-c...
Vanguard Target Date funds rebalance automatically.
> including asset selection
Vanguard's asset selection is "literally buy everything on the market". Its a dumb strategy, but it seems to work. In particular, Vanguard's total market index will perform by definition the average (minus Vanguard's very low fees).
> how to manage taxes
Its no harder than Betterment. You get a 1099-DIV next year, and then fill out your taxes. Since Vanguard Target Date funds automatically rebalance and everything, its unlikely that you get any benefits from Betterment.
So if you have $50,000 in capital gains and $53,000 in capital losses, your gains are "free". And you can deduct the extra $3k from ordinary income.
You can also carry capital losses forward each year.
You still aren't getting around the fact that you made a crappy investment somewhere to generate that loss.
If you have a diversified portfolio that is all gains, I think you're probably not actually diversified.
Diversified, but generally speaking it gains every year.
And no. Your portfolio is not as diverse as the entire market. Period.
Anyway, we are talking past each other.
Just felt like pointing out that you'd have to rebalance the same way Betterment does, which isn't the way I believe normal people do it. Betterment uses portfolio optimization techniques that can be hard to implement yourself: https://www.betterment.com/resources/investment-strategy/por...
If you don't want to even rebalance, then go buy one of the target date funds from the likes of Vanguard.
TLH is extremely oversold. I don't need to repeat what is easily found in a google search though.
Edit: looked it up, the 2050 is 0.16%, not bad. I usually see much higher fees on those target date funds.
as a general note, anyone interested in this should take a look at the bogleheads site, starting with their wiki: https://www.bogleheads.org/wiki/Main_Page
yes, definitely go straight to vanguard for any of their products! i should've said as much, thanks for doing so.
they're so easy to deal with there's hardly any point in purchasing any of their products elsewhere.
> and getting Admiral Shares of the corresponding mutual fund, which have much lower fees than the ETFs.
once you've saved up enough to buy into the admiral shares, that's certainly the easiest thing to do. but their ETFs are just shares of the admiral-level funds. so their expense ratios are identical.
https://personal.vanguard.com/us/funds/snapshot?FundIntExt=I... https://personal.vanguard.com/us/funds/snapshot?FundId=0928&...
https://personal.vanguard.com/us/funds/snapshot?FundIntExt=I... https://personal.vanguard.com/us/funds/snapshot?FundId=0970&...
that's apparently some sort of magic that vanguard has patented.
By having a separately managed account of ETFs or stocks, you can sell and exchange similar stocks when they lose value and harvest the tax losses to use at a later date.
IE: IRAs and Roth accounts instantly don't give a care, because they're not taxed. Soooo, no benefit to tax-loss harvesting.
IE#2: Any security that actually makes money will be unable to be tax loss harvested. (You need a LOSS to benefit from the tax loophole)
only if you're maxing out your tax advantaged accounts, and still have additional funds to invest is TLH even relevant.
https://www.hedgeable.com/blog/2015/09/how-to-protect-your-p...
For example I am a cautious investor right now. At Betterment this means I have to lean more towards their Bonds option, which yielded a very low return over the past year. At Vanguard, I can invest in the Income fund which is a mix of high dividend paying stocks and bonds. Still cautious but much better returns.
I actually use Vanguard target date for my tax-advantaged accounts, but I use Wealthfront for taxable account.
Hold only one index fund, hold it long-term and the problem vanishes: all the gains are not taxed until you sell the fund and they are always net of losses.
Not to mention the massive benefit of deferring taxes in a compounding context.
It worked pretty well for me in 2016. I was up ~11% total and about to deduct about 6% in losses.
Cash drag is the penalty you pay for the time and amount of your wealth that is spent in sub-productive, inflationary cash. The article states:
"Schwab allocates up to 30% of a portfolio to cash. In certain circumstances, keeping up to 30% in uninvested cash can result in up to a 0.56% annual return penalty"
This sounds like a worst case scenario. To roughly calculate cash drag, you can take the avg percentage of wealth that will be in cash throughout the year, then multiply by 5% rule of thumb avg returns. For example if you had to keep 10% in cash, that would be 0.1 * 0.05 = 0.5% in lost potential earnings due to cash.