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Comment by frinxor | Hacker News Reader

the short of it: Wealthfront markets itself as cheaper than vanguard etfs, but they actually charge 0.25% + ETF fees on top of that.

one of my favorite quotes:

"Here it is: If you open a retirement account, and you invest some of your paycheck each month into a Vanguard Target Retirement Fund, and you just…leave it…you just leave it right there until retirement…

…you don’t do anything when the folks on CNBC announce that the sky is falling; you don’t do anything when Cousin Eddy calls from a secure underground bunker in the badlands and says that the fed is printing money and it’s time to liquidate and ammo up; you don’t think it’s a sign that your parrot said “fuhgeddaboutit” but you thought she said “get a nugget” and surely that must mean a gold nugget? and you looked online and noticed that the price of shiny yellow metal was crashing and wait your parrot is also yellow and I’ll be damned if that isn’t a sign to buy…

… no, if you just leave it there to compound over decades…"

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> Wealthfront markets itself as cheaper than vanguard etfs

Do they? I always saw them as an alternative to a traditional advisor which can be 1%+ of assets. Even Vanguard can be overwhelming for some people who have to make choices on allocation[1]. For someone who wants auto-rebalancing and a set it and forget it manager, .25% isn't all that much. Obviously if you want to manage the money yourself you can always open a TD account where most of the ETFs used by Wealthfront/Betterment can be purchased commission free. But then the user is left doing buys, rebalancing, etc...

[1] For a complete no-brainer solution open a Vanguard account and dump everything into one of their target funds. Some people want something between the target fund and managing their own though.

> Even Vanguard can be overwhelming for some people who have to make choices on allocation[1].

What's wrong with their Target Retirement 20?? funds if you don't want to choose your own allocation?

Nothing is wrong with that fund (in fact the target funds are always my recommendations to friends when they are starting out), but there is a space filled by the robo-advisors between target fund buckets and more of a sliding scale of risk. Although, at that point if someone is picking more precise allocations through a risk proxy then they might as well skip the robo-advisors and do the work themselves.

Idea: as you get closer and closer to the target retirement year, start investing in the newest target retirement fund that year. For example, if you are investing in TR2060 now, start contributing to TR2070 in 2025 instead of sticking with TR2060. That way you can "choose" between multiple TR funds with varying levels of risk each year.

This is why I switched to Wealthfront.

I inherited an actively managed Morgan Stanley portfolio which has fees around 2-3% annually. I initially looked at managing everything myself, but didn't want to have to worry about all the finer points of managing one's own account. I may be losing the additional half of a percent, but in my mind, I am gaining far more.

There are also degrees of self management. You can see how the robo-advisor splits your money and with just a bit more work open a brokerage account and do the same split with the same funds (or very close). Then you just do buys once/month or quarter. Many of the ETFs used are also commission free at many of the brokers.

The key thing with fees is that high fees are often a sign of a poor manager or poor client service. Vanguard can charge low fees because they have huge amounts of money invested with them, as do other successful asset managers. The problem, as the article points out, is that people don't understand compounding - and have been brought up to associate paying a bit more with better products.

I work at a successful asset management fund, one that looks after Vanguard money. The vast majority of our staff's pension investments take exactly this strategy.

I started using Betterment because I thought their UI was pretty.

Yes, I realize they take fees (although I get a special deal for reasons despite having a smaller account). Yes, all things being equal, leaving my money in a Vanguard Target Fund would probably result in higher gains (heck, my 401k is still in a Vanguard Target Fund since it's set-and-forget).

But the Betterment UI makes putting in more money as simple as typing in a number and clicking two buttons -- so I feel compelled to save more ($50 here, $100 there). And that, to me, is worth the 0.15% fee that they charge.

Why not just schedule recurring buys? Then there are no buttons to click.

It's money that primarily comes irregularly; things like bonuses and the sale of RSUs and third paychecks in a month.

This puzzled me that, for the past few years, YC has wanted so badly to invest in more or less traditional style wealth management companies. It's so extremely hard to outperform existing methods in terms of returns. For user experience, these are the kind of things that are best if totally automatic, with no interface at all.

So I guess they just compete purely for growth and that's it - like the commercials for popular drugs on TV, it's an industry 99% about advertising?

SV tech + extremely risk averse, mature, competitive space = doesn't seem to be a good fit.

> This puzzled me that, for the past few years, YC has wanted so badly to invest in more or less traditional style wealth management companies.

There seems to be a strong belief in Silicon Valley that software is going to eat the fat margins in financial services and that there's all this potential for disruption.

The problem is that software's been eating financial services for the past 30 years and the fat margins aren't always as fat as they seem once you factor in things like compliance costs (or the demand curve is far steeper than you expect it to be).

Or once you factor in the profit motive and that the VC owners like margins & acquisition numbers to stay high. Quite a hard sell to convince investors to take higher risk on less money across the board. I'd never even attempt it.

Re: fat margins

A lot of that margin goes to the front line troops (whatever you want to call them-- brokers, advisers, planners, etc.) These are and have traditionally been charismatic people who were relatively high touch. If you think of them as providing a service to customers than they look like a massive cost center and the businesses that employ them ripe for disruption. But if you look at them as a sales force the picture becomes much clearer. Morgan Stanley wealth management has Bob who plays pickup basketball on the weekend with a bunch of doctors. What does Wealthfront have -- an ad on Yahoo finance?

My guess is that at some point these companies will pivot to trying to be the backend to a bunch of independents or small shops out there hitting the pavement. The customers will still end up with the 1-2% wrap, the robo-advisers will still end up with their .25% cut, but at least the customers won't be being put in high fee actively managed funds. So they'll be some improvement over the status quo.

So let's say Broker Bob's 200k of salary + expenses is buying you 10 doctors per year -- 20k per conversion.

I'm pretty sure the cost per conversion for your ad on Yahoo Finance is going to be a lot cheaper than Bob's 20k.

>My guess is that at some point these companies will pivot to trying to be the backend to a bunch of independents or small shops out there hitting the pavement.

It is already happening. See: Betterment Institutional, Schwab Institutional Intelligent Portfolios, and Motif Advisor

Additional issue is how these companies come about. They seem to be dependent on backtests to see if their secret formula works. While this approach might be workable in coding, it is not so straightforward in finance. As pointed out in the blog:

>But again and again, Wealthfront tries without blinking to draw a straight line between tax alpha and cold hard cash. For example, they offer a chart titled “After-tax Price Return of VTI vs. Direct Indexing” that appears to show that if you had merely flipped on Direct Indexing in 2000, you would have earned ~2% compared to losing 9% with Vanguard’s ancient index fund technology! They appear to reach these numbers simply by adding the maximum possible tax alpha to VTI’s return.

What Wealthfront did not talk about is - with S&P500 component stocks changing, so will the portfolio. It would need to rebalanced and constituted causing brokerage and other charges. While in hindsight it looks great, the actual trades during live environment could have been different.

Oh, I'm sure that startups know very well how poor and incomplete that methodology is. They just present this non-forward tested approach to fool the end users who don't know any better.

To me, the real question is to why VCs are interested in these kind of businesses at all given the scale they must achieve in order to make any money.

Even if they took 0.25% from the $1b they've got under management and they took 0.25% across all of it (which they don't), that's $2.5m. At $10b under management, they're making $25m - not exactly blowing the roof off from a VC point of view.

Now, the argument they make is "we will sell them other products and services" - but that, to me, is wishful thinking. Especially with the big boys like Vanguard and Schwab coming in in a big way.

Buy and hold forever is generally great advice, until it isn't.

I'd much rather not have 30%+ of my life savings wiped out in a single recession with the rest of the market.

In my humble opinion, thoroughly backtested trading algorithms based on hard statistics is the only rational way to participate in the market. The market is fundamentally an irrational entity, and investors should be looking for ways to systematically protect themselves from the market's irrational mood swings.

Check out Quantopian:

https://www.quantopian.com/home

Even a trivial moving average crossover algorithm like the one I currently have deployed can give you surprisingly robust protection against severe downswings, and outperform the overall market significantly over the long term despite the small losses caused by false positives.

http://i.imgur.com/ZhN0QIp.png

you should start a hedge fund, and charge 2.5%!

joking aside, i've played with quantopian way back, and think its a fun/cool concept

Can you show the forward performance, starting from the date when you chose those 4 parameters - 165.12, 172.44, 164.23, 156.02?

As you know, backtested results with carefully tuned magic numbers can potentially mean nothing.

Your overall point is not a bad one, but investors don't need "thoroughly backtested trading algorithms" to protect themselves. Frankly, many of the people who use "thoroughly backtested trading algorithms" don't do as well as they supposedly should.

It is, on the other hand, entirely possible for an average investor to learn basic technical analysis concepts and apply them visually to charts. At a minimum, for instance, if you can draw a trend line on a price chart and identify when price breaks important trend lines, you can easily avoid losses from major declines without having to write a single line of code or spend more than 5-10 minutes a day checking on your portfolio.

A decent book in this vein is The Visual Investor[1].

[1] http://www.amazon.com/The-Visual-Investor-Market-Trends/dp/0...

There's not a shred of evidence that technical analysis is anything but a charlatan's tool - same as trying to time the market. Technical analysis is bound to yield only losses for the investor and fees for the broker. The evidence points strongly against technical analysis as a method for building wealth - . And buying during upswings / selling during declines guarantees you lose.

Long-term value investing performs best, low cost index funds perform well, Wealthfront will underperform due to fees, and technical analysis will turn even a billionaire into a millionaire.

There is plenty of charlatanism in the world of technical analysis, just as there is in the world of fundamental analysis. But you're missing a key point: "technical analysis" is not monolithic. There isn't a single set of rules and indicators, all applied the same way over the same time periods. Most investors (and traders) lose money because of lack of discipline, poor money management, etc. This is true whether technical analysis is used or not.

Instead of creating a straw man argument, let's discuss something simple: trend lines. And let's discuss the most fundamental truth about trend lines: it is absolutely impossible for the current trend to reverse without key trend lines being broken.

Don't take my word for it. Pull up a chart of the S&P 500. The bull market that ended in late 2007 was easily identified by the breaking of long-term trend lines. And the bear market that ended in 2009 was easily identified by the breaking of trend lines as well. Just by use of trend lines alone (and no other technical indicators) you could have identified key turning points in the market.

How you act upon this information, if at all, is your choice. But that has nothing to do with technical analysis. That's investment/trading strategy.

>The bull market that ended in late 2007 was easily identified by the breaking of long-term trend lines. And the bear market that ended in 2009 was easily identified by the breaking of trend lines as well.

Trends are broken in periods surrounding major market corrections, indeed. How many false positives are there in between, in which you're turning over your portfolio for no reason?

Not all trend lines are created equal. Some are more important than others. You too are confusing technical analysis with investment/trading strategy. The breaking of a short or intermediate term trend line does not inherently call for "turning over your portfolio."

Depending on where you are in a trend, the breaking of a short-term trend line, for instance, could set up an opportunity to add to an existing position when the trend resumes.

Ahh, you can't have it both ways. Does a simple trend line, e.g. 12 month moving average, suffice to tell you to get in or out of a stock ("the bear market that ended in 2009 was easily identified by the breaking of trend lines")? Or does it have to be the right trend line? Moreover, how do I know what trend line to choose? I can choose great trend lines with the benefit of hindsight.

Also, forgetusername's point on false positives remains critical. Breaking trend lines is only a useful if it's right most of the time.

My advice to anyone who wants to be an enterprising investor (i.e. put more time into investing and try to achieve higher returns) is to read Ben Graham's The Intelligent Investor. Instead of trading based on the emotions in the market, invest by choosing great companies that are bargains.

A moving average is not a trend line. It's difficult to have a meaningful discussion if we are talking about two different things.

As for false positives, nobody reasonable will tell you that they don't exist. But again, there's a difference between short, intermediate and long-term trend lines. Even under the most unfavorable scenarios, anybody with a modicum of knowledge of trend lines would have been out of the market before the 2008 crash and back in the market by early 2010 because major trend lines were broken. Incidentally, I was one of those people.

As for your advice: there's nothing wrong with fundamental analysis. Although many people fail to make money using it (just like technical analysis), it's worth noting that quite a few savvy professionals use fundamental and technical analysis together.

http://www.followingthetrend.com/2014/05/why-technical-analy...

This is downvoted to light grey, but it's excellent advice. All you really need to understand are the concepts of support, resistance, momentum, and trending.

Support: a price which a significant number of market players have decided is probably the least amount the stock could be worth. That is, if the price drops to that point, they will buy. They might be wrong, but it will require an even larger number of people who think the stock is definitely worth less to make them wrong.

Resistance: the flip side of support: a price at which a significant number of market players will sell.

Momentum: the tendency of price to continue in the direction that it's going until it encounters support or resistance. Many traders attempt to profit from the short-term price swings caused by momentum. By doing so, they tend to cause the price to continue to go in that direction.

Trending: what happens when changes in the economy are reflected in the prices of stocks. Such changes don't happen instantaneously; they take time.

Momentum and trending are obviously similar, but I distinguish them in this way: momentum is mostly caused by the flow of information within the markets; trending is caused by changes in the fundamentals.

If you understand these concepts, you can see everything a long-term investor needs to see when looking at a chart.

thoroughly backtested trading algorithms based on hard statistics is the only rational way to participate in the market. The market is fundamentally an irrational entity

You do realize those two statements contradict each other?

What's also funny to me is that 'thoroughly backtested trading algorithms based on hard statistics' will work consistently until they fail miserably.

During a recession event the 30% loss isn't real until you close your position, with trading algorithms the time to hold is so low that any losses are very quickly realized.

If you're invested in an index fund, wouldn't the only way to realize the loss during a recession be to sell? Anyone who stayed the course after 2008 would have seen record gains in the years following.

You're right, but it would still be better to realize a small loss early in the crash and and buy back in at the bottom than just ride the whole thing out. Of course, that kind of timing is pretty much impossible so everyone suggests you don't do it.

Yes, but consider the "accumulation phase" (pre-retirement) vs. the "distribution phase" (retirement). At some point, you need to sell part of your portfolio to to pay your bills []. Check out "sequence of returns risks".

Or buy annuities, setup a bond ladder, or hold dividend stocks, but these have their own, related issues.

Early in the accumulation phase, however, I completely agree with you -- you're making the central argument for a long-term buy-and-hold strategy.

"backtested trading algorithms"

Your algorithm can predict the past.

Congratulations.

I don't think you know how these work

tosseraccount has an excellent point. Overfitting is a huge danger. In the end only trading the live market for some time will tell you whether you have a profitable strategy.

Your algorithm will likely not stand up to Walk Forward Analysis/Optimization/Testing: https://en.wikipedia.org/wiki/Walk_forward_optimization

I recommend reading "The Evaluation and Optimization of Trading Strategies" by Robert Pardo.

It's really the most fundamental rule for every type of machine learning task -- there should be both a (1) test set and (2) a separate holdout validation set. No matter if the task is classification, sequence prediction, regression, manifold learning, clustering, whatever.

Really surprising how so few amateur traders understand this fundamental principal. Scientists too.

> Buy and hold forever is generally great advice, until it isn't.

That's a truism. I could say the same thing about algorithmic trading.

The fact of the matter is that the median hedge fund manager has negative alpha. It is extremely difficult to pick winners via any strategy. In fact, it's so difficult that for people who can do it, the resulting lifestyle and compensation is so great that the asset management shops that they work out have almost zero attrition.

Moreover, the whole point of passive investment is that the odds of that kind of a market-wide crash affecting your money over a 30-year timespan are infinitesimal. If the market actually were to devolve like that, nobody would make money in the market, regardless of strategy.

> Investors should be looking for ways to systematically protect themselves from the market's irrational mood swings.

Yes, it's called diversification.

I won't harp on the backtesting point, but what I will say is this: I'm sure that you understand the risk-reward tradeoff. It would be impossible to participate in any sort of finance and not know this concept. Quite frankly, the probability of 30%+ of your life savings being wiped out in an index fund is unbelievably low. You eat some return at the expense of lower volatility, but we're talking about a 401(k) here. We want that kind of expected stability.

"the probability of 30%+ of your life savings being wiped out in an index fund is unbelievably low"

The crash of 69 : 36%

The crash of 73: 48%

The crash of 87: 33%

The dotcom crash 2000: 50%

Housing Bubble 2007: 56%

[ source : http://traderhq.com/illustrated-history-every-s-p-500-bear-m... ]

The odds that at some point a portfolio of S&P 500 stocks will be 30% off a recent high is actually very high.

Wars. Panics. Depressions. Plagues. Recessions. Revolutions.

They still happen.

I don't know much about the market, and know even less about actual investing strategy-ish stuff, but what does the loss look like five years later?

I guess what I mean is, for an "index fund", crashes don't seem to be... permanent?

Perhaps that's small comfort for someone who's set to retire the month after one of these 30% crashes, but I guess that's what the whole "invest more conservatively as you get older" thing is supposed to help with?

> I guess that's what the whole "invest more conservatively as you get older" thing is supposed to help with?

The big index and mutual fund companies offer different allocations between stocks and bonds. You might start out with 80% of your account in an index fund (or other diversified basket of stocks) and 20% in a hedged basket of investment-grade, low-risk bonds. This percentage allocation would change over time as you got closer to retirement.

You're not going to get insanely rich off of this, but it is a decent replacement for the fact that savings account interest rates are effectively 0% these days.

'Wiped out' to me implies more than a temporary difference between recent high and recent low which both probably existed for far too little time for you to be the first person to realize to sell at the peek and first person to buy at the bottom.

Yes, they do. I did not dispute that. But as I said (perhaps not sufficiently clearly--my mistake), and as other posters have pointed out, this neutralizes out over the 30-year time horizon of an index fund investment. One dollar invested in the S&P 500 in 1970 would become $43.12 in 2000, for example, despite the crashes of 73, 87, and 2000.

I repeat, if the market were bad enough that these crashes actually wiped out your account over a 30 year period, nobody would make money in the market at all. Index funds are a low-risk, low-return investment with low management fees. They're a much better investment choice for a retirement account than algorithmically trading that money. And if you were good enough at algo trading to make solid returns over time, you might as well quit your day job and open a hedge fund or asset management shop.

check out Nikkei 225 past 25 years... http://finance.yahoo.com/echarts?s=^n225+interactive#{%22ran...

The only quibble I have is that taxes would outweigh the advantages here. You either do this in a tax free account, or your trading needs to be a lot better!

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