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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                 As you can see cash flows into mutual funds when markets are up and are withdrawn […]

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 […]

Minimize Your Investment Taxes

Our Chief Investment Officer, Burt Malkiel, famed author of “A Random Walk Down Wall Street,” has spent the past 40 years explaining that investors can’t control the market, so they should focus their efforts on the three investment tactics within their control: Diversify and rebalance your portfolio Minimize fees Minimize taxes Previously, we published posts on the value of diversification and minimizing fees. However, too often the industry avoids talking about one of the most important aspects of maximizing your long-term investment results: minimizing taxes. The Seven Ways to Minimize Taxes There are seven ways Wealthfront can significantly reduce your investment taxes: Using Index Funds Rebalancing your portfolio with dividends Applying different asset allocations for taxable & retirement accounts Tax–loss […]

You Can’t Get Access to the Best Alternative Assets

One of the services most frequently touted by private wealth managers is their ability to provide access to outstanding alternative assets like hedge funds. Unfortunately very few private wealth managers have access to the hedge funds that are worth the fees. Of course, that won’t stop them from promising you the best and delivering poor alternatives. That’s why David Swensen, Yale’s Chief Investment Officer and the man most identified with employing alternative assets, essentially says in the introduction to his groundbreaking book Pioneering Portfolio Management, that if you can access premier alternative assets like hedge funds, you should, but it’s highly unlikely that you can, so you shouldn’t. Understanding Risk and Reward As we have explained many times in this blog, […]

When Should You Exercise Your Stock Options?

Stock options have value precisely because they are an option. The fact that you have an extended amount of time to decide whether and when to buy your employer’s stock at a fixed price should have tremendous value. That’s why publicly-traded stock options are valued higher than the amount by which the price of the underlying stock exceeds the exercise price (please see Why Employee Stock Options are More Valuable than Exchange-Traded Stock Options for a more detailed explanation). Your stock option loses its option value the moment you exercise because you no longer have flexibility around when and if you should exercise. As a result many people wonder when does it make sense to exercise an option. Tax Rates […]

Choosing Asset Classes Is Another Form of Market Timing

Any reader of our blog will know that we are not fans of market timing. As our CIO Burt Malkiel is fond of pointing out, research consistently proves it’s almost impossible to outperform the market by attempting to time it. Burt has won great acclaim since he first wrote about this phenomenon 40 years ago in A Random Walk Down Wall Street. The lessons of 40 years ago are just as appropriate today, which is why the book is still a best seller and soon to be released in its 11th edition. We have written about many ways to time the market on this blog — choosing individual securities, investing in individual real estate properties, timing when to withdraw from […]

How New College Grads Should Approach Stock Compensation

Over the past two years we have written numerous posts to help you evaluate job offers that include stock options or Restricted Stock Units (RSUs). We assumed in all our posts that job seekers were evaluating offers from companies at a similar level of maturity. For many new graduates, however, the comparison gets more complex if you aren’t sure whether you want to join a very mature company like Google or an earlier stage company like one of our recommended mid-sized companies with momentum. The purpose of this post is to help make that task much simpler. The Mechanics of Stock Options Let’s start with the basics of stock compensation. A stock option gives you the right to buy common […]

The Right and Wrong Reasons to Change Your Risk Tolerance

Our clients sometimes ask us how often they should change their risk tolerance score. The answer is: Not often. You won’t be surprised to find that the question comes up most frequently when the markets are either up big or down big. Human nature leads us to want to increase our risk tolerance when we experience an up market and decrease our risk tolerance in down markets. Like most everything in investing, what feels right seldom is. There are a few good reasons to change your risk tolerance but there are also bad reasons that you should learn to recognize and avoid. Good Reasons: Significant Financial Changes There are several significant events that can change your risk tolerance: A major […]

Demystifying Venture Capital Economics, Part 3

The funding of almost every new and successful technology market can, to the uninitiated, have the appearance of a financial bubble. A tsunami of venture capital flows into hot new markets at what appear to be ridiculous prices. Amazingly, the capital invested in the market winners is almost always justified. A few other companies will drive small returns while the vast majority of new entrants will lose money. This dynamic benefits the premier venture capital firms and consistently hurts second-tier firms. Most successful new markets begin the same way. A market-sensitive technologist recognizes an inflection point in technology that enables a new kind of product. It’s not uncommon for more than one individual to recognize the potential of the new […]