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Comment by chollida1 | Hacker News Reader

What I'm most excited to see in the event of a market downturn is how well Betterment and Wealthfront hang onto their clients.

I'm guessing that the average client of those firms hasn't really lived with a significant stock market investment during a bear market. Will these clients keep their money invested in a larger percentage than the typical ETF investor?

If so then I think that's a huge bullish signal for these new types of wealth management firms.

If not, then those companies are going to have to go out and raise money in a downturn.

If you can hold peoples money during a downturn, then I view that as a very positive investment signal, there has to be something more than the dollar, bitcoin, hedge funds, and gold that people can turn to in a downturn.

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I've got friends in the Canadian version, WealthSimple. They've got some pretty good writers that put out articles related to money and saving and what-have-you and wrote this one a little while back: https://www.wealthsimple.com/en-ca/magazine/data-downturn

They really seem to want to help educate their customers. Of course, they want to do this because the more educated they are on the matter, the less likely they'll pull their money out.

Laughable. If the customers were better educated they wouldn't put their money in WealthSimple.

I don't see why you say that. I'm quite happy as a customer. I pay a low fee (by Canadian standards) to have my money automatically balanced between ETFs. I could do it myself, but A: I might make mistakes, and B: I have to pay attention to it.

They don't claim they're doing rocket science.

I'm unfamiliar with what a low fee by Canadian standards is. Maybe in Canada it's a good deal. My comments were US-centric. Sorry, I should have realize that it should be compared to other Canadian options.

Maybe others think differently but I see those two companies as a way to set it & forget it invest. I can afford to invest $X every month. I'm going to put it in a robo-ETF company & not think twice about it. That means not paying attention to the market at all & playing the long term.

The only thing I might do, which contradicts what you suggest, is try to increase my input each month during a bear market if I can afford it.

> I'm going to put it in a robo-ETF company & not think twice about it. That means not paying attention to the market at all & playing the long term.

Maybe I'm missing something about how ETFs work, but AFAIK the Japanese stock market is way bellow where it was in the late '80s - early '90s, so that anyone who would have invested in related ETFs back then (had those ETFs existed, of course) would have lost lots of money in this 20-years span. If the same thing were to happen to either the European or the US stock market (i.e. a long period of stagnation) then putting money in a "a robo-ETF company" will be a losing bet (and it is a bet, make no mistake about that).

Buy something that is globally diversified. If the global economy is on a 20 year downturn you probably have more serious problems than your investments.

> Buy something that is globally diversified.

That's the thing, can ETFs do that? I.e., can they make active investment decisions (like, how do you diversify globally)? By the current definition I think the answer is "no", but it's interesting how things will evolve, though.

What? Why can't ETFs do that? Buy some combination of MSCI World and something for "emerging markets" and you're halfway there.

> Buy some combination of MSCI World and something for "emerging markets" and you're halfway there.

During the last crisis (2007-2011) the stock indexes fell almost in unison around the world (including MSCI World). Had you "diversified" into it in February 2008 (just as Bear Sterns was imploding) you wouldn't have made your money back until 2013-2014 (I took the data from here: http://www.stockq.org/index_en/MS001.php). Correlation can hit you pretty damn hard. But there were active investors who made lots of money during that same time-frame.

Later edit: Plus, switching from a ETF focused on US stocks to one focused on MSCI World (let's say) looks like active investing to me, i.e. you have to take an action based on what you think the future will bring (in this case you think MSCI World will be more stable than US stocks). I was responding more to the OP when he was saying about how he/she would like to put his/her money in an ETF and forget about it.

And most of those stock indexes recovered within 1-2 years. If you didn't panic sell your paper loses would have gone away pretty quickly. Not to mention almost no one's cost basis would be the peak price from 2007, most people would have an average cost basis of lower than that do to periodic investments from previous years.

If your doing a long-term buy & hold strategy, you really don't need to worry about temporary dips in your portfolio. That's why the ETF-and-forget-it long-term strategy is nice. If you're investing and you don't have a long time horizon or you're scared of a dip in your portfolio, you don't belong in the stock market anyway (stick to bonds and other conservative investments).

>Had you "diversified" into it in February 2008 (just as Bear Sterns was imploding) you wouldn't have made your money back until 2013-2014

That's paper losses - unless you panic sold

If you kept investing throughout that time, you'd be substantially further ahead than otherwise

I think it is still possible to have a 20 year "downturn" and the world doesn't deteriorate. Essentially a complete reversal of what caused growth in many different industries. I'll just go through a couple of industries.

Banking - Governments around the world decide to break up big banks. This allows for the return of small local co-ops that aren't listed on the stock market. Now the market is super competitive and so the big banks stock go into decline (the hypothetical value of the co-ops increase but you can't capitalize on that).

Mining - Recycling gets so advanced we no longer need to mine stuff. Mining industry is no a shadow of its former self. New industry isn't as valuable as before as the barrier to entry into recycling is much lower.

Healthcare - US government decides to take over the industry because a cultural shift. Industry collapses.

Now, we live in a world with no Wall St, environmentally stable, and everyone has access to healthcare. But the people who went into ETF's essentially have no money. Obviously, this world would require much reform (more taxes), but one that I don't think is entirely unobtainable.

You're making the assumption that someone just put all their money into the market at once. People use dollar cost averaging and add money to the market every week or month. So if you put all your money in at the top, yes you;d not be doing so well. But more likely you put money in before, during and after that event and today you'd be well up when you consider dividends and appreciation.

Also, you'd want to diversify outside of a single market, like Japan stocks. You'd want to be diversified across bonds, stocks, real estate, currencies, precious metals, commodities, etc. This is so easy and inexpensive to do today for the average person.

Dollar cost averaging across a broad spectrum of investment instruments over a long period of time is better than holding cash.

> You'd want to be diversified across bonds, stocks, real estate, currencies, precious metals, commodities, etc. This is so easy and inexpensive to do today for the average person.

I mostly agree with you, my question was addressing the "invest in ETFs and forget about it" part that OP was talking about (the "robo-ETF company"). What you're proposing sounds more like active investing, which of course will be one of the few viable options once a global crisis re-emerges.

Dollar-cost-averaging and diversifying your portfolio are orthogonal to active/passive investing. (Though arguably DCA is a bit more on the passive side, as it avoids trying to time the market.)

DCA and diversification are more-or-less the bread-and-butter of routine buy-ins to ETFs, MFs, etc

You rely on the fund to be diversified within its target sectors, and you diversify by picking multiple different funds across different sectors.

Exactaly right. And in part of the DCA strategy as you described I also DCA into a cash fund (liquidity fund) that can be used at a time I judge opportune. That is if there's a housing crash, I'll have a hard asset I can use to jump into that opportunity. Of if there's a market correction or crash, I'd be able to use a portion of that cash to buy low.

It's not quite timing the market because the portion going into cash is scaled accordingly to how much is going into other types of funds and also has the benefit of being used if there's an emergency that requires a decent amount of liquidity.

Having it all in liquidity would be a poor choice. Cash should only be a part of the overall strategy.

The 2 robo-ETF companies mentioned basically have you set a risk tolerance level & then invest in a diverse selection of ETFs on your behalf. The company's job is to keep your investment balanced based off the risk tolerance level you suggested. So a risk tolerance level of 5 might mean your investment should have 30% of it in bonds. If your portfolio ever moves to 31% bonds it will re-adjust by selling some of your bonds ETF. Hence my comment about "invest in ETFs and forget about it".

I believe the above mentioned companies also offer non-ETF investments for customers with over 100K. In this case instead of putting your money into an ETF, they basically buy the individual stocks that the ETF would have been tracking.

Other thing: Their entire revenue stream is based on percent fees from current assets. During market downturns, total assets drop, which means their revenue drops. Not only are more of their customers likely to withdraw funds during a downturn, but the companies themselves have never existed during a downturn.

The hope is that the fund you are invested in reverses their long positions to short positions, and those assets keep on increasing. I wouldn't trust any money manager that wasn't ready to change their position to match the immediate market at the first sign it was profitable to do so. You don't want a "wait and see" money manager, you want a shark.

The problem is that good ones who are actually good charge such high fees that it eats up all the difference they make, and also end up being bad after a while anyway. Bad ones do the same thing but lose more, faster.

In a gold rush, sell shovels.

What kind of funds do you invest in? Most people invest in long-only funds.

The only fund I trust to manage any of my assets currently is FSI(futures strategies inc). It's a private fund that accepts outsiders if a member introduces them and they meet capital requirements. They are very quick at reversing their position, sometimes dozens of times per day. Fees are a flat 2% of managed capital, taken quarterly. I've been with them for the better part of a year, and so far(knock on wood?) there have been 0 losing weeks since I joined.

That said, the majority of my capital is traded by me. It's all in the futures market, specifically US debt instruments.

Good for you. Anyway the discussion here is about investing, not trading.

2% quarterly? How is that ever going to be the market long term?

I assume that's 2% annual (i.e. 0.5% per quarter). And a fund changing its exposure dozens of times per day is not in the business of beating the market.

"Better part of a year" is not a very long track record.

I'm about to open an account on one of those services. I'm 47 and am terrified that I'm not saving enough for retirement and am hoping that the service can give me some peace of mind or at least help me with a plan.

I'm a big fan of them. Some people hate on them for the 0.25% fee but I think for a lot of people it's well worth it (and better than paying more for an in person advisor that provides zero value).

They will set you up with a solid investment plan and rebalance for you, just don't get caught up in their tax-loss harvesting hype. Their value is in giving you the peace of mind that you seek, the tax loss harvesting benefit is overstated imo.

> (and better than paying more for an in person advisor that provides zero value)

that isn't the only other alternative to betterment, etc. https://www.bogleheads.org/wiki/ https://investor.vanguard.com/mutual-funds/target-retirement...

Yeah that's a fine option too to just put in a target fund and forget about it. It's debatable how much more value you get from a roboadvisor wrt rebalancing + diversification + tax loss harvesting.

I don't think Wealthfront etc. have any advantage w.r.t. diversification or rebalancing. Vanguard's target retirement funds seem to have target allocations (which change gradually as the retirement date approaches), and rebalance to stay in sync with those. E.g., VTTSX seems to maintain ~90% stocks and ~10% bonds, with ~60% of the stocks being domestic, and ~70% of the bonds being domestic.

They do have an advantage in tax loss harvesting, but the maximum annual savings is basically $3000 * (current marginal bracket for ordinary income - LTCG rate in retirement), which is about $600 for the typical investor. If you have more than 250k in Wealthfront, their annualized fee will be greater than $600.

The roboadvisors invest in market segments not included in the target retirment funds (like natural resources and REITS). If you were to do that on your own using various vanguard vehicles you'd then have to worry about rebalancing.

Well you still get exposure to companies in those segments, such as Monsanto and Equity Residential. If you just want "normal" positions in those companies (i.e. weighted by market cap), then Vanguard funds like VTSMX (a component of their retirement funds) are perfect.

Heres a plan for you,

1. open a brokerage account with your bank, 2. buy vanguard index funds for the next 20 years, 3. retire.

That's roughly my plan.

The details are what get me. I need to buy index funds and usually you are advised to save as much as you can. I want the advice that shows me how little I can save. My kids are only going to be kids once and I'm not going to forgo taking them to Disney or work stupid hours so that I can live like a king when I'm old. My goal is to live as well as I can today while still being certain that I'm not going to be a burden on anybody when I'm 80.

Paying an expert for advice appeals to me just because I have no confidence that I'm not taking something important into account.

> Paying an expert for advice appeals to me just because I have no confidence that I'm not taking something important into account.

I've got good news and bad news for you.

The good news is that you're not as clueless as you think.

The bad news is that person you're paying to give you advice? They also don't have a clue, but it's their job to make you feel like they do.

Anecdotal evidence: 12 years of investing with Edward Jones in various mutual funds (2005-2017), and I would have made waaaay more money if I'd just bought ETFs to begin with.

Sure, a financial advisor is comforting to talk to, but the fees they charge are murder on your long-term return, and in the end they're just paid to spend all day reading strategy papers which at best will give them the same return as a cat picking stocks. [0]

[0] http://www.businessinsider.com/cat-beats-professional-stock-...

All available evidence points to x% of financial advisors being no better at picking investments than those they are advising, and the remaining (small) fraction capturing all the additional value they provide, and then some, via their fees.

So either your advisor is good, and you pay them more than they are worth, or your advisor is bad, and you still pay them more than they are worth. You cannot create more (dollar-denominated) value for yourself by engaging a financial advisor.

You aren't missing anything. You need extraordinary skills, contacts, or crimes to beat the market, and if you had what it took, you'd already be in the financial industry. So just buy the index funds and hold them in a non-margin account, year after year, until you can live for a year on 3% of your accumulated principal. That's all the investments advising you and everyone else in the 99% will ever need.

So, say I had $1 million in my retirement account at age 67 (I have maybe 1/2 that today). I could use $30k of that each year on top of my social security benefits, correct?

Seems like I will want about twice that. Maybe $2 million saved so I can have $60k / year and I don't think that's going to happen. Shit.

The prevailing advice for a long time was 4%, but bond yields have been so low for so long, that people have been questioning whether 4% is truly safe any more.

If you're retiring at 67, 4% is probably safe. $1.5M would be an acceptable target for you at that age.

Thanks for taking the time to write all this.

I'm going to dig into this some more (I really dread it) but I'm guessing I need to save another $500k or so over the next twenty years. Not impossible but not painless either.

I'm glad I started college savings accounts for my kids when they were born. They should each have $75-100k in them by the time they need it. Not enough, but it's a start.

Go with Wealthfront or Betterment. Wealthfront is cheaper I believe if you don't have over 100K invested.

All you have to do is set up a bank account to automatically put money into your account every so often. That's easy to do on their platforms. They'll keep it balanced among several ETFs based on how risky you're feeling. You won't have to pay any fees to purchase or sell the ETFs like some places charge. They do a great job of making sure you understand where you're at & what you're likely to retire with. They also post plenty of information to help you understand your investment.

The actual math for how much you need to save is, roughly:

25 times your annual expenses.

At your age, with a US assumption, you have the benefit of Social Security almost certainly providing you a good portion of income at Age 67 (any time between 62 and 70 is reasonable, and taking SS at age 62 is best unless you are very likely to live past 84.)

Ignoring SS, if you invest 25 times your annual expenses into a 60%/40% stocks/bonds split, your expenses will be roughly 4% of your investments, so you withdraw 4% each year. Your investment growth (including dividends) may or may not exceed your expenses, but, overall, you should make it 30 years without running out of money. [0]

What you need to do is determine your expenses (including Disney trips), and make sure you don't exceed that budget once you stop having income. (Of course, you can and should adjust if things go better or worse than expected when you're retired.)

[0] https://en.wikipedia.org/wiki/Trinity_study

If you want an idea, try to figure out the cost of annuity for the amount you want to retire with. That is probably a good target for how much you should save.

Do yourself a favor and think carefully about the compounding effect of the fees before using one of these services.

I'm actually really surprised that Betterment used what was essentially scare-tactics to keep the money in the account.

They showed what our effective short term gains capital tax amount would be as a way to sway you from withdrawing. Negating the fact that they are showing you what your tax amount would be at the highest federal and state tax margin.

Nice to know max tax bill is $500 lower but it gave me quite a pause. I guess it's effective.

Should the electronic brain managing these funds do something smart in the event of a down turn? It would be nice if these funds made more rational choices than humans.

I could see a lot of users of the companies adjusting their risk either up or down depending on how they want to play the market.

"Playing the market" is the antithesis of what these firms claim to offer. They keep you on track for asset allocation and maybe the occasional tax loss harvesting. Nothing that couldn't be tracked via a simple spreadsheet and 15min in a brokerage account on whatever time scale people want to rebalance or tlh

The rational thing is to buy more cheap stocks during a downturn. The is called "rebalancing".

>> The rational thing is to buy more cheap stocks during a downturn

Are you sure? If the price is decreasing, you see buying as profitable? When the price is decreasing, I see profitability as selling. The path of least resistance is the one your money needs to travel.

It would be ideal to sell the moment before prices start falling, and buy the moment before prices start rising again.

But since predicting the future is difficult, and fluctuations make meaningful "rising" and "falling" only obvious in hindsight, you might as well sell when prices are unusually high and buy when prices are unusually low. Which probably means that you will be buying when prices are still falling.

Contrarian Investing ... https://en.m.wikipedia.org/wiki/Contrarian_investing

> The path of least resistance is the one your money needs to travel.

what is that even supposed to mean?

if the price is dropping, the market is full of shares for sale. it is somehow easier to sell your shares when there is an excess for sale?

It's not easier to sell, it's easier for the price to move down..since as you said, the market is full of shares for sale.

You don't buy into the sell off unless you have an incredibly high pain threshold with your equity(ie you are an institution or a market maker, and chances are, you aren't if you are reading this)

> buy into the sell off

I've been doing this with crypto lately.. Man it is brutal. But I'm not leveraged, so my only pain threshold is "can i sleep at night?"

I'm such a contrarian, i f*ing hate going with the herd. So what can i do?

As a great trader(John Grady) once said, the trick is to run with the herd....and to stop right before they head off the cliff.

But in all seriousness, going with the herd is the low-risk move. Depending on your trading platform for the cryptocurrencies you are trading, you might have access to cumulative delta information. That's the best way I know of to accurately gauge what the "herd" is doing. Once you see the price is reacting to match the delta(ie, if delta shows buying, and you wait until the price begins to react upwards), this is the moment to join the herd with low risk. The price reacting upwards means that sell-side liquidity has either been consumed, or has been pulled in response to the buying. These are when you can expect those quick bursts up in price, and that closes your scalp trade for a quick profit with minimal risk.

This needs another reply, I didn't answer your question about what the "path of least resistance" meant.

So if you are prices are rapidly climbing, the path of least resistance is up. If you buy, there are currently many other people buying, and that supports your long position. There isn't an abundance of people selling(otherwise the price would 1) stop or 2) fall), so the path of least resistance is not down.

There is something in new(and some old) traders mind, that causes them to sell into a rally, and buy into a crash. They think "this is the top/bottom! yea baby!". The probability of them being correct is very low, since being "correct" means you are accurately predicting the actions of thousands or more individual traders with no evidence. I say "no evidence" because if the everyone is buying, there is no evidence that selling is occurring beyond the short limit orders that buyers are consuming.

I'd guess you know the term "pullback". A pullback occurs when many people(or few people with large size) have the thought that "This is the top/bottom!" at the same time. When the pullback stops and the trend resumes, that's all of those people being wrong at the same time.

Generally robo-investors do the same thing all the time: The portfolio expects to have these holdings at these target percentages of the portfolio. If one holding is low and another is high (by more than some specific margin) sell a bit of the high one to buy a bit of the low on.

This eases your fall in a market where different things are falling at different rates, theoretically.

I just rolled a 401k over into Wealthfront a month ago and I realized it's pretty pointless since the cost of buying the ETFs and rebalancing is much less than their fee, so it may look like a panic to them if and when I do it.

Then again, I've also (to my discredit) sold on the downs before. But (besides hindsight) how do you distinguish a secular decline from a temporary panic?

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