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Your financial plan is solid, you’ve even set aside a rainy day fund. Now what? How do you invest well? Get a better understanding of investing with ETFs, asset allocation, rebalancing, and tax-optimization strategies.



Smart Beta

Fads and fashions have always been part of the financial markets. Around the turn of the century Internet-related stocks were regarded as reliable instruments for growing and preserving wealth. During the early 2000s, real estate was the instrument of choice for savvy investors. Today “Smart Beta” is the mantra of legions of securities salesmen who claim that broad-based low-cost index funds are sub-optimal and that better results can be obtained by biasing portfolios toward a number of characteristics that promise higher returns. There is no universally accepted definition of “Smart Beta.” What most people using the term have in mind is that it may be possible to gain excess (greater than market) returns using a variety of relatively passive investment […]

What Role Should Bonds Play in Your Investment Portfolio?

According to a recent report by the Bank of International Settlements the amount of global debt passed an ignominious milestone last year, rising from $70 trillion in mid-2007 to over $100 trillion by the middle of 2013. Global borrowing has soared since the financial crisis as central banks suppress interest rates to spur growth and corporations take advantage by raising capital at low cost. This matters because yields on investment grade bonds are near all time lows. The investment returns for those bonds over the next 10 years will almost certainly be lower than over the last 10-30 years. Putting today’s bond market into context “Don’t fight the Fed!” is surely sensible advice as the Federal Reserve has skillfully, tenaciously […]

The Math Behind the Single-Stock Diversification Service

At Wealthfront, we pride ourselves on combining world-class investment expertise with great engineering. So when we first set out to build the Single-Stock Diversification Service, building a product with unparalleled ease and convenience in solving a tricky client problem was not enough. Making recommendations to clients requires solid research and math. So, before we wrote our first line of code, we began looking at the two key questions faced by clients with large single-stock positions: Should I sell my single-stock position and diversify? If I am to sell, when and how should I do it? Should you sell your single-stock position? Many clients who speak to us about their single-stock position express some hesitancy in selling their company’s stock. After […]

The Post-IPO Dilemma: Hedging Your Stock

If your company recently went public and your stock price has gone up significantly then you’re probably wondering how you can hedge your position. Unfortunately there’s nothing you can do while you’re still in the 180-day lock-up period. Most lockup agreements have extremely detailed restrictions included, designed to prevent almost any form of market participation with a security.  It’s too long to reproduce anything but a sample here, but it typically begins like this: In consideration of the Underwriters’ agreement to purchase and make the Public Offering of the Securities, and for other good and valuable consideration receipt of which is hereby acknowledged, the undersigned hereby agrees that, without the prior written consent of each of [names of managing underwriters], […]

Shining a Light on the Muni Bond Portfolio

Most everyone I have ever met who is in a high tax bracket wants Municipal Bonds to be part of their portfolio. Unfortunately there are a number of misperceptions about Muni Bonds that cause people to make investments in them that are not necessarily in their best interest. This article explores how investors typically build Muni Bonds portfolios and the often-excessive fees they pay for such services. We also show how an ETF-based Muni Bond portfolio might be a superior approach when evaluated from the perspective of its impact on an entire diversified portfolio. Bond Ladders Most people are sold Muni Bond portfolios in what is known as a bond ladder. A ladder consists of a diversified portfolio of bonds […]

Missing the Obvious on Fees

I have a personal confession. For nearly 50 years, I’ve missed the “obvious” reality: Fees for investment management are not low. They are high; very high. When investors recognize this “new reality” — that fees are not trivial but are crucial — the beautiful “inside” world of fund management will experience a powerfully disruptive revolution. It may not be sudden, but it is inevitable. Investors are not captives of the conventional practices of “performance” investing. They have proven alternatives. The process of getting to the “Ah ha!” moment can come through a few examples of how easy it is to miss (or misinterpret) reality. Missing the obvious Sometimes it’s due to deliberate deception — as when a magician has you […]

When to Diversify Across Financial Advisors

Last month Wealthfront hosted an event that featured our chief investment officer, Burt Malkiel.  It’s wonderful to listen to Burt, because he discusses the markets with such clarity. Markets go up, and markets go down.  You can’t control them. As an investor, you should instead focus your efforts on the three things you can control that will make a difference:  Diversify your portfolio, minimize fees and minimize taxes. During our Q&A session, one of our clients asked Burt, “Does it make sense to diversify across financial advisors?” Burt’s answer was simple: “There is no real benefit to diversifying advisors if your advisor follows my advice of diversifying your portfolio across index funds that represent a variety of asset classes. Hiring […]

The False Comfort of SIPC Insurance

How Wall Street Brokers See The Facebook IPO

Prospective clients often ask why they should trust Wealthfront to manage more than $500,000 of their assets if SIPC insurance only covers up to that amount. You might be surprised to learn SIPC insurance is quite irrelevant when it comes to asset protection.  In fact it has seldom been used over the 42 years it has been available. Simply put there are exceptionally few cases where investors have lost money due to a brokerage firm going out of business. The Securities Investment Protection Corporation (SIPC) is a nonprofit, membership corporation, funded by its member securities broker-dealers that was created 42 years ago to restore funds to investors with assets in the hands of bankrupt and otherwise financially troubled brokerage firms. […]

The Unexpected Impact of Commissions

The recent enhancement to our tax loss harvesting service prompted a few readers to privately ask if it’s possible for us to use Dimensional Fund Advisors’ (DFA) mutual funds rather than ETFs to implement our service. Prior to our launch in December 2011, we considered both Vanguard and DFA products as they offer what we believe are the best net of fee returns in the industry. Before we launched our service we met with DFA sales reps and learned that on average DFA funds generate the same return as Vanguard on a net of management fees basis. In other words DFA funds earn a higher gross return, but their much higher management fees end up negating that advantage. We went […]

The Importance of Daily Tax-Loss Harvesting

Wealthfront in the News

Minimizing taxes has been a regular theme in many of our posts this year. After all, we believe minimizing taxes is one of the three actions you can take to maximize your long-term performance (the other two are properly diversifying your portfolio and minimizing fees — other areas at which we excel).  Harvesting losses offers the biggest opportunity to minimize your taxes (see Minimize Your Taxes for a complete list).  As we have often explained, financial advisors to the ultra-wealthy have employed tax-loss harvesting for many decades, but their use of the technique has typically been limited to performing it on a once-a-year basis at year’s end. The frequency with which an advisor can tax-loss harvest is a function of the […]