Tax Loss Harvesting. This is the sole reason why Betterment(/Wealthfront) is superior to Vanguard. The benefits of this technique more than offset any fees they charge.
So even if my investments were in the black in the macro scale, with tax loss harvesting I can realize additional gains from the inevitable dips that happen on the more micro scale.
Once you tax loss harvest once, you lower your cost basis on the investment to less than you originally paid. You can only subsequently tax loss harvest on the same security to the extent that the value of the investment is lower than your new lower cost basis. This will become harder as time goes on and you have previously tax loss harvested many securities.
Their white papers all use a timeframe of 10 years to show that Wealthfront is cost effective. I'm pretty sure they don't want customers thinking through all the implications of longer investment time horizons.
If you're presupposing the assets are similar, this is unlikely to happen to any significant degree.
The standard way to increase your odds of being able to tax loss harvest is to own as many different uncorrelated securities as possible. You can take this to mean a fund per industry (as Betterment and Wealthfront do) or even to the extreme of only owning individual companies. That way, some are up and some are down, and you can TLH. The more slices you divide your portfolio up into, the longer you'll be able to do it. But I think realistically (especially factoring in inflation), this strategy will stop giving results before 15 years.
(Make sure to turn off inflation-adjusted)
I think you'll see that in the last 90 years, even the worst market crashes don't take the index down to a level lower than what it was 15 years prior. To put it another way, pick any time in the past 90 years, the S&P 500 is always higher 15 years later than that date and every day afterwards. Maybe slicing up your investments into finer-grained categories than the entire S&P 500 will help ... but I'm very skeptical that anyone can TLH for long periods successfully.
If you want to pay a perpetual 25 basis points per year for Wealthfront or Betterment, go ahead, but it seems unlikely to me you'll come out ahead of a simple index fund if you are investing long term.
Like I said though, I have seen very significant returns from my loss harvesting. Even without a yearly source of capital gains, it definitely does not hurt to collect the losses and use them later in life (for instance if you sell an investment property).
No. If you own the assets directly, and they are traded on the exchange (like the ETFs WF/Betterment use) they can be transferred around without triggering a sale event. Target date funds and the like would probably have to be sold.
I have my tax advantage at VG and my taxable has been all over the place finally settling with CS for now.
Although Betterment offers fractional shares, which is confusing, not sure if they're actually ETNs representing fractional ownership of ETFs. I don't know how that works legally.
[1] http://support.bettermentforadvisors.com/customer/portal/art...
With regular brokerages you can move stocks/funds around with a transfer.
"What is Tax Loss Harvesting? Tax loss harvesting is the practice of selling a security that has experienced a loss."
https://www.betterment.com/resources/investment-strategy/bet...
i.e. cycle long term gains after one year of ownership so that they are more likely to produce harvestable losses in the next year. Obviously this prevents the basis gains of TLH, but wouldn't it be dwarfed for users whose long-term capital gains tax rate is much lower than their short-term capital gains rate?
See: http://www.investopedia.com/articles/taxes/08/tax-loss-harve...
Even in taxable accounts TLH is really oversold. It's another way to shift taxes around, which can be good, but the obvious methods of maxing out tax advantaged accounts should be done first.
Also, Vanguard can easily implement TLH.