Tag Archives: Andy Rachleff

Tax-loss harvesting as a behavioral tool

It’s extremely hard to invest when markets are down. We all know it’s the “right” thing to do, but it’s hard to act in the face of fear. Unfortunately, the popular media doesn’t help. As an investing culture, we have a gaggle of catchphrases that warn you away from buying when things get tough. Aphorisms like “don’t catch a falling knife,” “the trend is your friend,” “avoid value traps” litter the investing landscape. Each time the market gets topsy-turvy, CNBC posts images of a ravaging bear, claws and fangs ready to ravage your investment portfolio. As we wrote in How To Invest In A Falling Market, it’s no surprise that study after study finds investors tend to buy high and […]

How Do You Recognize a Sinking Ship?

Kenny Rogers probably didn’t realize his now famous lyrics “You’ve got to know when to hold ‘em. Know when to fold ‘em.” was also outstanding career advice. All too often people stay too long on a sinking ship, a company headed toward failure, which can have a huge opportunity cost. Few hiring managers you subsequently encounter will give you credit for staying until the end; rather you’ll likely be viewed as having bad judgment for having done so. You need to understand the early warning signs of failure so you can move on to a new company before it is too late. By the way, the high failure rate of startups is one of the reasons I recommend that people […]

10 Things You Probably Didn’t Know About Tax-Loss Harvesting (and should)

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 […]

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 […]

There’s No Need to Fear Stock Market Corrections

Individual investors react very poorly to stock market corrections. Many individual investors sell when the market declines out of fear it will never come back. The data, which we will present in this post, actually says the opposite. Not only will the market come back, but it will do so a lot sooner than you might think. As you can see from the chart below, over the past 50 years there have been 14 market corrections and 11 bear markets. The industry standard definition of a market correction is a peak-to-trough decline of at least 10% and the definition of a bear market is a peak-to-trough decline of at least 20%. For the purpose of this analysis we rounded up […]

Fees Can Destroy Your Return

In an environment where a diversified portfolio is only expected to return on the order of 6% annually, any fees will have a significant impact on your outcome. In the same way that investing for the long-term takes advantage of the power of compounding, the regular or recurring fees you pay reduces the overall potential of your portfolio. To illustrate the point, here’s an example from the SEC on its own fee fact sheet: If you invested $10,000 in a fund that produced a 10% annual return before expenses and had annual operating expenses of 1.5%, then after 20 years you would have roughly $49,725. But if the fund had expenses of only 0.5%, then you would end up with […]

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, […]