Pro Tips: 10 Things You Probably Didn’t Know About Tax-Loss Harvesting

For decades tax-loss harvesting was an obscure tool to minimize taxes that was only available to the ultra wealthy. That all changed when Wealthfront launched its tax-loss harvesting service in October 2012.  Many pundits and industry professionals who were unfamiliar with its benefits thought it couldn’t add much value. One of our competitors even referred to the concept as a “joke.”  Well times have changed and now every  automated investment service offers a version of tax-loss harvesting. However, there are still many misperceptions of how and when tax-loss harvesting creates value, even among very intelligent investors. Here’s our Top 10 list of things you probably didn’t know about tax-loss harvesting: Tax-loss harvesting derives its benefit from the combination of tax-rate arbitrage […]

Tax-Loss Harvesting for Everyone

In October 2012, Wealthfront became the first automated investment service to offer daily tax-loss harvesting to its clients. Tax-loss harvesting is one of the most important ways to both lower the taxes you’re likely to incur from your investments and also dampen the effect of a down market. Like most of our innovations, tax-loss harvesting was previously only available to the ultra-wealthy. Wealthfront automated the strategy through advanced software, improved it, and brought it directly to the individual investor. Since that launch, we’ve worked tirelessly to make our tax-loss harvesting even better. Wealthfront daily tax-loss harvesting now features enhancements like intelligent recovery, optimized harvesting triggers, predictive deposits and tax-sensitive withdrawals. In fact, our research shows that our third generation daily […]

Introducing the Next Level of Direct Indexing: The Wealthfront 100

In December 2014, Wealthfront announced the next generation of index investing, our new Tax-Optimized Direct Indexing platform. A replacement for the US stock portion of a Wealthfront portfolio, Direct Indexing allows Wealthfront clients to participate in the US stock market not just by owning an ETF, but through direct ownership of many of the underlying US stocks. The result is a portfolio of individual US stocks and one or two complementary ETFs that’s optimized to track the overall performance of the broad US market but is also capable of harnessing the countless opportunities of tax-loss harvesting enabled by the movement of individual stocks. Many of our clients have already taken advantage of the power of Direct Indexing. In fact, since its launch in […]

The Illusion of Stock-Picking Skill

I first visited a Wall Street firm in 1984. I was there with my longtime collaborator Amos Tversky, who died in 1996, and our friend Richard Thaler, now a guru of behavioral economics. Our host, a senior investment manager, had invited us to discuss the role of judgment biases in investing. I knew so little about finance at the time that I had no idea what to ask him, but I remember one exchange. “When you sell a stock,” I asked him, “who buys it?” He answered with a wave in the vague direction of the window, indicating that he expected the buyer to be someone else very much like him. That was odd: because most buyers and sellers know […]

Even Warren Buffett Prefers Index Funds

In last year’s Berkshire Hathaway annual report and shareholder letter Warren Buffett caused quite a stir by suggesting that upon his demise the assets he was leaving his wife, in trust, should be invested in index funds (see “Warren Buffett: ‘Investing Advice For You–And My Wife,’” “Will Warren Buffett’s investment advice work for you?,” “Warren Buffett’s 90-10 Rule of Thumb for Retirement Investing,” or “The Warren Buffett Guide to Retirement Investing“). The primary reason for the hubbub was probably the contradiction it represented in coming from Mr. Buffett. An endorsement of index investing from the man who is thought of as one of the greatest stock pickers of all time seemed to fly in the face of all that Buffett […]

Attempting to Maximize Your Return Isn’t Always a Good Thing

I am often asked “why shouldn’t I always choose the highest risk portfolio if it’s expected to generate the highest return?” That seems like a very reasonable question. In fact if everyone were rational they should choose the highest risk portfolio for exactly this reason. Unfortunately, very few people are rational. Chasing Returns Will Hurt You As our chief investment officer Burt Malkiel pointed out in Investors’ Most Serious Mistake, individual investors tend to chase returns. In other words they invest after markets have risen and sell when they decline. The chart below illustrates this behavior.                 As you can see cash flows into mutual funds when markets are up and are withdrawn […]

Two Billion Reasons to Believe

“A revolution is coming — a revolution which will be peaceful if we are wise enough; compassionate if we care enough; successful if we are fortunate enough — But a revolution which is coming whether we will it or not. We can affect its character; we cannot alter its inevitability.”                                                                                                            — Robert Kennedy, May 6, 1966 Like many who join Wealthfront, it all started for me with […]

Qualified Small Business Stock Is An Often Overlooked Tax Windfall

It’s no secret that small businesses have long been the growth engine of the US economy. With that in mind, over the years Congress has packed the tax code with lots of breaks for those investing in small business. One of the best breaks around — and no secret to experienced angel and venture capital investors in Silicon Valley — is qualified small business stock (QSBS). What Is QSBS? Like all things in tax, the IRS definition of qualified small business  can get complicated, and it changes depending on the section of the tax code in question. For our purposes, we’ll be focusing on Section 1202 of the Internal Revenue Code (IRC). To qualify as QSBS under Section 1202: The […]

What Long-Term Return Should I Expect?

One of the most common questions posed to our client services team is “What is the expected long-term rate of return I can assume if I invest in a diversified portfolio?” Based on return estimates derived from the market (not Wealthfront’s opinion), an optimally diversified portfolio of low-cost index funds is expected to generate an annual long-term pre-tax  return of 4% – 6%, depending on how much risk you are willing to tolerate. It should be noted that the returns achieved over the past two years were much higher, but as you know past returns are not indicative of future returns. Returns Are Almost Impossible to Predict Some of you might be disappointed with this expected long-term return. I wish it […]