Why Do Automated Investment Service Portfolios Differ?

The rise of automated investment services like Wealthfront is redefining how people invest their money. The combination of strong academic financial research, software, and exchange-traded funds has allowed firms to offer optimally designed portfolios at extraordinarily low costs. But while most of the major automated investment services, including Wealthfront, base their portfolios on Modern Portfolio Theory (MPT), the portfolios that they create for people are very different. How could this be? As I explained in What Long-Term Return Should I Expect? (and in-depth in our investment methodology white paper), MPT is very sensitive to the inputs that go into it. Different estimates around the volatility, correlation and expected return of each asset class – the key inputs into an MPT […]

How To Beat The Market

There are a million web sites, books and pundits who will tell you that you can’t beat the market. They’re all wrong. Or, at least, they’re not framing things correctly. And I think that’s a major problem. My Wife’s Disappointment This thought occurred to me the other day when I was hiking with my wife in the redwoods of Muir Woods National Monument, outside of San Francisco. We were hiking and talking and, as sometimes happens, we started talking about investing. I was telling her about automated investment services like Wealthfront and what they were doing for the world. I explained how they built broadly diversified, optimized portfolios that are managed at extraordinarily low costs. I talked about how they […]

Debunking The Myth of Magical Options Strategies

Earlier this month, Duncan Gilchrist and I wrote a blog debunking the idea that you can achieve high returns with limited downside using hedge funds. Our research compared the risk adjusted returns of a standard, broadly diversified Wealthfront portfolio with the average returns of hedge funds over the past ten years. The data showed that, despite all the hype, money and excitement hedge funds elicit, you would have achieved a far better risk-adjusted return with a Wealthfront portfolio. Specifically, the Wealthfront portfolio posted a Sortino ratio of 0.62 vs. 0.43 for the HFRI hedge fund index during the time period studied. Importantly, we also showed how much quicker the Wealthfront portfolio bounced back from the financial crisis of 2008, with […]

Why Did Wealthfront Hire A World-Class Research Team?

Readers of our blog know we are big advocates of passive investing. We believe that buying a broadly diversified portfolio and running it at extraordinarily low costs is the foundation of any sound investment strategy. Given how simple our approach is, you might ask why we employ a research team of six PhDs led by Burt Malkiel, the man who inspired the creation of the index fund. What, exactly, do they do all day? Well, for more than forty years, Burt has said that since you can’t beat the market you should focus your investment efforts on the three things that actually can make a difference to your investment returns: diversifying your portfolio, minimizing cost and minimizing taxes. Not surprisingly, […]

Smart Beta and Factor Timing

A new research paper from Denys Glushkov, Research Director at Wharton Research Data Services of the University of Pennsylvania is raising some eyebrows in the smart beta world. The paper is one of the most comprehensive independent looks at the performance of smart-beta ETFs, and the results are not pretty. Despite looking at 11 years of real data, the paper finds no evidence that smart beta ETFs have outperformed the market on a risk-adjusted basis. To be specific, the study looks at the performance of 164 domestic equity smart beta ETFs and comes up snake eyes. The result must come as a shock to the smart beta industry. To date, most of the “studies” on smart beta have been from […]

The Fight for a Fiduciary Standard

Wealthfront was founded on a simple vision: that every investor, large and small, deserves sophisticated financial advice. And contrary to a large majority of the industry, we always put our clients first. A teacher making $50,000 a year deserves the same high-quality investment service as an institution managing $500 million. It’s why I signed up as a Wealthfront client when it launched, why I joined the company two years ago, and what inspires me and my colleagues to come to work each day. If you come visit our offices in Palo Alto, you’ll see a giant chalk wall in the back of the office reminding us of this. All the ideas center around one thing: doing the best possible thing […]

Don’t Believe the Hype: The Myth of High Returns and Low Downside

Common sense tells you that it’s not possible to earn a high return without taking on significant risks. And yet, the dream of a “free lunch” in investing persists. Google the phrase “high returns with low risks” and you get over 1 billion results, including articles from esteemed outlets like Forbes, TheStreet.com and MarketWatch. We hear similar promises about newfound smart-beta ETFs and other forms of financial engineering. Here’s some advice: The next time someone makes this kind of promise to you, look the other way. Because the data on how many of these promises come true is brutal. Data Don’t Lie Burt Malkiel, our chief investment officer, has pointed out for more than four decades that it is almost […]

Software Based Companies Should Be Judged On Their Rate Of Innovation

Software is eating the world and it’s pretty clear why. Unlike their people-intensive predecessors, software-based businesses have the ability to improve their offerings at a rapid rate. But software is not a commodity, and not all companies are able to innovate at the same rate. Understanding that matters, because committing to a software-based vendor that is not the innovator in its space will likely lead a customer to incur significant costs in the form of lost opportunity – and that opportunity cost is usually quite tangible. Not All Automated Investment Services Innovate At The Same Rate Allow me to illustrate this with automated investment services. To the uninformed observer, all the players appear to offer the same service – a […]

Introducing Kate Aronowitz, VP of Design

At Wealthfront, we are constantly pushing the boundaries of the traditional industry to deliver on our mission – everyone deserves sophisticated financial advice. We quickly learned that in order to keep delivering on this belief, we needed more than an audacious mission — we need to build an exceptional company. To achieve that goal, we need to attract world-class talent in three major areas: investment research, software development and management. I’m proud of the progress we’ve made thus far. We’ve been fortunate to attract financial luminaries like Burt Malkiel and Charley Ellis to our investment team. Our software team includes some of the best from companies like Apple, Facebook, Google and LinkedIn. Our management team includes six professionals who helped […]

Three Financial Issues to Consider When Getting Married

While it is often said that no two things are more certain than death and taxes, marriage can bring a measure of uncertainty to your taxes as well as your finances. Questions have arisen among Wealthfront’s clients about how tying the knot — a milestone in many people’s lives — can impact your financial obligations to the government, and potentially affect how you structure your finances. With this post, we share a few points on this topic. Keep in mind, however, that finances and taxes can vary greatly depending on an individual’s or a couple’s specific situation, and what state they live in. We recommend consulting a qualified accountant or tax attorney. In fact, we have written a couple of […]