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The Right Way and the Wrong Way to Benchmark a Diversified Portfolio

One of the biggest challenges for an investor is to determine how well her diversified portfolio is performing. The two most common benchmarks featured in published advice are: S&P 500 A 60/40 Stock/Bond portfolio Unfortunately, most published advice is incorrect. That’s because it usually encourages comparison to an irrelevant index or too generic of a model portfolio. In our opinion, the right way to benchmark a diversified portfolio is to take into account risk and taxes. Let’s Start with Indexes Most individual investors think they should benchmark their diversified portfolios against a stock index like the S&P 500®. That’s probably because such indexes are the only indexes with which they are familiar or the only indexes their financial advisors used in […]

It’s About Automation, Not Fees

Automated investment services are successful because they are automated, not because they are low priced. They are low priced because they are automated, but that’s not why most people choose them. Broadly, preference for automation is a generational thing, much like music. Baby Boomers who grew up on rock ‘n roll didn’t transition their musical taste to classical when they got older. They were conditioned as a generation to like a particular style of music, and stuck with it. We believe the same is true for the way people interact with the Internet. While older people like the convenience of the Web, they also like talking to people “in person.” In contrast young people who grew up “digitally native” prefer […]

Demystifying Venture Capital Economics, Part 5: When Should New Entrants Partner with Incumbents

At some point in its evolution, every startup faces the question of whether or not it should partner with a large company to accelerate its growth. On the surface, partnering almost always looks like a great idea. Unfortunately, the reality is seldom as rosy. Partner Motivation: The Chesbrough Framework In my experience, understanding your potential corporate partner’s motivations will tell you a lot about how likely it will behave post investment. In my product/market fit class at the Stanford Graduate School of Business, I use Hank Chesbrough’s outstanding framework to describe the motivations that drive corporate partnerships (Hank is a professor at the University of California’s Haas School of Business). Like most compelling frameworks, it is based on a simple […]

Investment Fees Matter, But Taxes Matter Even More

For more than 40 years, our Chief Investment Officer Burt Malkiel has been telling investors that you can’t outperform the market, so you should buy index funds and focus on the three things over which you do have control: minimizing fees, minimizing taxes and staying diversified. Minimizing fees gets a lot of attention from personal finance bloggers, but minimizing taxes gets almost none. That’s because these tax-minimization strategies are often hard to understand and even harder to put into practice, and thus have mainly been used by high net worth individuals who are serviced by well-paid financial advisors. And that’s bad news for the portfolios of average investors like yourself, because as I will show in this article, taking steps […]

Demystifying Venture Capital Economics, Part 4: What Analysts Get Wrong About Innovation

In 2014 our CEO, Adam Nash, caused quite a stir when he said “In the next 10 years, everyone will be using some form of automated investment service.”  Frankly, many market analysts thought he was nuts. Twenty-five years in the venture capital business leads me to believe Adam is right. As a matter of fact, I think automated investment services will ultimately attract more than $2 trillion of assets. So what leads to the enormous difference of opinion Adam and I have with market analysts? In my experience, industry observers consistently make the same mistake. They evaluate innovations based on their magnitude of adoption, rather than their rate of adoption. Put another way, they over-emphasize the current size of the […]

Last Minute Advice on Retirement Accounts

Ordinarily, important investment decisions shouldn’t be rushed. But this week presents an exception, because you only have a few days left to contribute to your retirement account and get a credit for the amount on 2015 taxes. You need to do so by Monday, April 18, 2016, the same day taxes are due, which is three days later than the traditional filing date, on account of April 15 being a holiday in Washington D.C. And if you don’t already have a retirement account, you’re also going to need to open one by Monday. (The deadline to do so with Wealthfront is Friday, April 15.) Retirement accounts are a somewhat complex topic, with so many permutations that most people can’t absorb […]

How do I know my financial advisor is doing the right thing?

How do I know my financial advisor is doing the right thing? The recent significant drop in world financial markets has created a lot of anxiety – especially among people new to investing. In times like these, investors who outsource the management of their investments can’t help but wonder if they chose the right person or firm to manage their money. The challenge is it’s really hard to tell who is doing a good job when markets decline. The financial press is saturated with two false promises: the promise that there are people who can reliably beat the market, and the promise that there are people who can reliably protect you from a downturn. Despite overwhelming research to the contrary, […]

Important Lessons for New Investors

Wealthfront has grown rapidly by bringing the benefits of sophisticated investment management to a huge new generation of investors. For many of our clients, investing with Wealthfront is their first direct exposure to the stock and bond markets, and unlike savings accounts, stock and bond markets can rise and fall. For new investors, reviewing your account to find less money than you put in can be a rude shock. Where did the money go? Rationally, we all know that markets go up and down, but it feels different when you see the impact in your own account. It can even lead new investors to wonder why they made their investments in the first place – or whether services like Wealthfront […]

Five irrational fears that keep people from firing their advisor

Everything about investing is irrational. As we have often written on this blog, what feels like the right thing to do usually isn’t. The most classic example is a falling market. We all know we should invest when markets decline and sell when they rise, but that’s counter to what our emotions tell us. Lots of investors have an emotional connection with their advisor as well, and one of the most harmful irrational behaviors we see is an unwillingness to change advisor relationships. As best as I can tell, there are five common irrational reasons why clients are reluctant to leave their current advisor: They fear they will lose the opportunity to borrow at a preferred mortgage rate They fear […]

A Deep Dive into Direct Indexing

The most unique aspect of Wealthfront’s automated investment service is our Direct Indexing service. Direct Indexing is a classic example of Wealthfront’s strategy of using software to make investment services broadly available that were previously only available to the ultra wealthy. Depending on account size, Direct Indexing can add 0.20% – 0.50% to your annual after tax return above and beyond what’s achievable with our core service, which includes daily ETF-level tax-loss harvesting. With this post we hope to explain why Direct Indexing is so unique and how it’s possible to offer such compelling value. What is Direct Indexing? Direct Indexing is, in our opinion, the next-generation of investing. Direct Indexing allows Wealthfront investors to hold the individual securities that […]