Tag Archives: diversification


Why You Shouldn’t Just Invest in the S&P 500

Diversification matters. Diversification is the key to long-term investment success because it can insulate you, to some extent, from losses. If you feel insulated, you are more likely to stay invested and keep investing through market volatility. Being properly diversified also enables the actions that help you during market corrections: rebalancing and tax-loss harvesting. Investors often think they have a diversified portfolio when, actually, they don’t. One of the common questions we get from investors who don’t use Wealthfront is: “Why shouldn’t I just invest in the S&P 500®?” They seem to believe investing in an index that gives them exposure to a broad selection of securities means they have a diversified portfolio. Having a broad selection of securities is […]

Risk Matters

Risk is a four-letter word. So are pain, hurt, and fear. But when it comes to investing risk just does not get the respect it deserves. As an investor the first tenet of risk is to never ever take a risk you cannot afford to lose. Investors create risk for themselves by not making time to make their income, spending and savings visible enough to make rational decisions. There are several other factors that you, as an investor, need to keep in mind. Risk is determined by the investor’s staying power. As John Maynard Keynes said, “Market prices can stay irrational [or become even more irrational] longer than the investor can stay committed to his position.” The geniuses at Long […]

Inflation: How Should Investors Prepare for the Future?

Recent data on inflation reminds us of the famous Sherlock Holmes “dog that didn’t bark.” Despite numerous warnings from financial-market pundits that inflation is just around the corner, inflation statistics remain benign and surveys of inflation expectations suggest that price-level expectations are well contained.  So what is the outlook for inflation? Are there reasons for complacency or are there reasons for concern? And if inflation is a threat over the longer term, how should investment portfolios be allocated so as to mitigate the risk? A New Era of Price Stability? Those who are sanguine about our ability to maintain price stability argue that the world economy is beset by a condition that might be described as one of “secular stagnation.” […]

How To Sell Your Single-Stock Position Tax-Efficiently

We recently launched the Single-Stock Diversification Service — an easy way to transition from large holdings of a single stock (perhaps that of your current or ex-employer) to a Wealthfront diversified portfolio. One of the problems we aimed to solve with the Single-Stock Diversification Service is tax-optimization. We knew that many of our Single-Stock Diversification Service clients would have multiple types and lots of employee stock that they would want to diversify. It becomes difficult to know which shares to sell first to get the best after-tax outcome when some of your shares come from restricted stock units (RSUs) and others from exercised stock options. To make matters more confusing, many of the shares have vested at different times and […]

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 […]

Introducing the Wealthfront Single-Stock Diversification Service

When LinkedIn went public in 2011, the company had about 1,500 employees. Traditional private wealth managers were ubiquitous on campus in their efforts to sign-up the 50 to 100 early employees and executives who met their firms’ multi-million dollar minimums. Unfortunately, that was of little help to the 1,400 other employees at the company looking for support. At Wealthfront, we believe everyone deserves sophisticated financial advice. Today, we’re launching the service I wish the entire LinkedIn team could have had access to back in 2011. Introducing the Wealthfront Single-Stock Diversification Service. This service will help solve a critical problem for many that work at public technology companies: How to best diversify concentrated holdings in your company’s stock. Such holdings are […]

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 Benefits of Diversification

We’ve been gratified by the feedback we’ve received on our recent post Why You Shouldn’t Just Invest In The S&P 500. However some of our readers are still grappling with the question of why a broadly diversified portfolio is better than a portfolio that includes only one asset class. To make the point clearer, we decided to do a follow-up post with more data and ways to visualize the value of diversification.  We have also updated our previous post to include the graphics introduced in this post. [...]

Why You Shouldn’t Just Invest in the S&P 500

Investors often think they have a diversified portfolio when, actually, they don’t. We know this because our clients sometimes ask us things like, “Why don’t I just invest in the S&P 500®?” They seem to believe investing in an index that gives them exposure to a broad selection of assets means they have a diversified portfolio. But that’s only one of the dimensions of diversification. A good portfolio is actually diversified across three different dimensions: assets, markets and time. [...]

Sacrifice of the Bondholders

Investors throughout the world have been flocking to so-called “safe havens.“ The 10-year U.S. Treasury Bond has recently been trading at a yield between 1.5% and 2%. Short-term U.S. Treasury interest rates are near zero. Even if inflation stays at a 2% rate over the next decade[1], U.S. bonds will be a sure loser, providing negative real (after inflation) rates of return. If interest rates rise to more normal levels, investors will suffer substantial capital losses. Interest rates are also low in the center of Europe as well as in Japan. There are no “safe” economies where savers are able to earn positive real returns on government bonds. Most of the developed countries of the world are burdened with excessive […]