Categories: Investing Insights, Planning & Taxes

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 […]

Categories: Investing Insights, Planning & Taxes

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 […]

Categories: Investing Insights, Planning & Taxes

Why Wealthfront is a wise choice for finance professionals

At first blush, the suggestion that finance professionals should choose an automated investment service like Wealthfront to manage their investments seems to make little sense. Wouldn’t folks who monitor 30-day moving averages and asset class correlations for a living prefer to actively manage their investments? Don’t they have pockets full of arbitrage trade ideas just waiting to be executed? As someone who formerly worked in fixed income derivatives, I can tell you that these idealized versions of how financial professionals handle their own portfolios rarely, if ever, occur in real life. One reason is the NYSE’s Rule 407, which applies to any employee of a firm that does business with NYSE Euronext, is a member of FINRA, or is registered […]

Categories: Investing Insights, Planning & Taxes

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 […]

Categories: Investing Insights, Retirement

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, […]

Categories: Investing Insights

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 […]

Categories: Investing Insights, Retirement

Your 401(k) May Not Be the Best Way to Save for Retirement

The Wealthfront blog has always made a commitment to focusing on data-driven, actionable advice. Sometimes the data challenges conventional financial advice. In this post, we look at the gospel that 401(k) accounts are the best way to save for retirement. As we will explain below, a significant number of investors could even be better off saving money in a taxable, automated investment account with direct indexing and tax-loss harvesting than they would in a 401(k). For many of you, particularly those who have long advocated for the benefits of 401(k) accounts, this might be hard to accept. However, the data clearly shows that the potential drag from high fees in 401(k) accounts and the powerful tax-deferral benefits of newly available […]

Categories: Planning & Taxes

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 […]

Categories: Planning & Taxes

Real World Data: Wealthfront Tax-Loss Harvesting

Nothing we write about at Wealthfront raises people’s interest like tax-loss harvesting. The spectrum of opinion is extreme; with some believing it’s a brilliant advantage for investors and others convinced it’s chicanery. We launched our automated daily tax-loss harvesting service almost three years ago and have been running the service ever since. As a result, we have more empirical evidence on the actual performance of an automated strategy than anyone. We recently analyzed our empirical results over that time period and thought we would share that data to further understanding of this innovative and beneficial investment strategy. A History of Tax-Loss Harvesting The concept of tax-loss harvesting has been around for more than a century. For that entire time it […]

Categories: Investing Insights

Why Index ETFs Are The Automated Investment of Choice

Vanguard Group introduced the first passive investment product, the index fund, in 1975. We’re very proud that our Chief Investment Officer, Burt Malkiel, inspired Jack Bogle, the founder of Vanguard to create the index fund when he published his groundbreaking book, A Random Walk Down Wall Street, in 1973. Eighteen years after Vanguard launched the first index fund, State Street introduced the first exchange-traded fund. ETFs have grown to more than $2 trillion in assets, having recently surpassed index funds. Practically speaking, it wasn’t until the ETF became popular, around 10 years ago, that passive investing could broadly appeal to the masses. An ETF is a basket of investments, which, like an index fund, mirrors an underlying sector or index. […]