After some research in personal finance last week, I moved my balance from Wealthfront to Vanguard mutual funds/ETFs. I was already using them for my 401k. Their expense ratios are the lowest in the industry and they also have managed retirement funds you can use to replace Wealthfront if you are lazy. Here is a quick way to learn about the Bogleheads investment philosophy.
I too moved from a roboadvisor (Betterment) to Vanguard. The knowledge you need to make effective decisions on your own in Vanguard only takes 2-3 hours to acquire (at the Bogleheads link you provided). Highly recommend people take the time to learn instead of having your assets charging quarter after quarter by a roboadvisor.
EDIT: I'd still love for Vanguard to create Betterment's version of RetireGuide, which takes into account your income and various other financial parameters, and tells you how much to save in which accounts (tax deferred, 401k, etc). I'm a sucker for sexy UX.
So the general goal with Bogleheads is a way to retire wealthy as a middle-income earner? Via long term saving?
I've always liked that idea as an alternative to doubling down with entrepreneurship. There's always the constant internal debate between both paths. It's nice to have a good guide to map out how to accomplish it, as the investment path comes with much more certainty if you have the right amount of self-control.
>> So the genral goal with Bogleheads is a way to retire wealthy as a middle-income earner? Via long term saving?
More focused on the hows of the saving than the goal of it. Although there's some overlap it isn't the same type of community as something like Mr. Mustache Man that emphasizes a specific life-plan (in that case very early retirement).
It's a helpful community. Sometimes a bit doctrinaire about "rules of thumb" that are very useful for many people, but aren't exactly laws of the universe, but that's hardly the worst thing in the world.
Just make it automatic. Put 15% in every check and invest intelligently.
Don't be a trader, but don't have a religious acolyte of someone's investment philosophy. Most quarters my portfolios are growing 2-3x than my contributions. It's a great feeling.
I did the same thing about 2 years ago, after I calculated how much in fees Wealthfront (or Betterment) would cost me. I also didn't agree with some of the investment choices they force you to make (Wealthfront invested 5% in commodities, Betterment is heavily biased towards foreign stocks), which turned out to be good calls on my part - at least for now.
Anyway, investing a portion of each paycheck turned out to be too much repetitive work, so I wrote a cron job to do it for me automatically (more work, but more interesting work!). Then, I added automatic tax-loss harvesting once Betterment added theirs. Then, some friends wanted to use it, so I built a UI.
I'm thinking about releasing it to the public. To do that, I would have to become a registered investment advisor, but that's not a big deal - just taking a test and filling out some paperwork. Would anyone be interested in paying $10/month for this service? I'm currently working on setting up a marketing site explaining what this thing does: https://zenve.st
This is very cool. How do you allocate the money (i.e. into which Vanguard funds and what percentage each)? I understand that you do a risk tolerance test, but how do you diversify among asset classes? Also how are you going about tax loss harvesting?
You get roughly your age as the percentage invested in bonds, with some adjustments up or down for risk tolerance. For taxable accounts, the bonds will be VTEB (tax-free munis). For nontaxable accounts, the bonds will be VCIT/VWOB (corporate bonds / emerging market bonds). The stock ETFs are VTI (US), VEA (foreign developed), and VWO (emerging markets). Nontaxable accounts also get VNQ (real estate), based on how much real estate you already own.
For example, my taxable account is:
60% VTI, 18% VEA, 12% VWO, 10% VTEB
Tax-loss harvesting is a bit tricky. In order to tax-loss harvest, you have to sell one ETF and buy another correlated ETF. This is usually done by purchasing another company's ETFs (ex: Schwab). Unfortunately, while Vanguard charges no fees for its own ETFs, it does charge fees for others' ETFs.
The algorithm takes this into account though, so it only initiates a harvest if the tax refund you'd get is significantly larger than the cost of buying the non-vanguard ETF. In order to make this cheaper, VTI is paired with VOO - even though the index tracked is different, they are highly correlated with each other (>99%).
Be careful. Buying an ETF from another vendor that tracks the same index, like say an S&P 500 index ETF from Vanguard vs. Fidelity, can still trigger a wash sale. Granted, it's harder to find through simple transaction matching, but an audit might trip you up.
Yes, I agree. The pairs Zenvest uses for tax-loss harvesting all track different indexes (another reason why VTI is paired with VOO instead of SCHB - even though the indexes VTI and SCHB track are nominally different, they consist of the same stocks):
VTI (Total US Stock market) / VOO (S&P 500)
VEA (FTSE Developed All Cap ex US, 3735 stocks) / SCHF (FTSE Developed ex-US, 1471 stocks)
VWO (FTSE Emerging Markets All Cap China) / SCHE (FTSE Emerging Index)
The Bogleheads forum is also often very useful for getting your personal finance questions answered, though of course the usual Internet stranger disclaimer applies.
The maximum yearly gain is $3000 * your marginal income tax rate. So, if your marginal tax rate is 33%, it would be $1000/year. This is because you can write off a maximum of $3000 of losses on your taxes every year.
The information you may find about tax-loss harvesting gains on the internet is usually incorrect if it comes from people trying to sell you something. For example, Betterment / Wealthfront claim that it adds an extra 1% of returns (only if you have a $100,000 portfolio and your marginal tax rate is 33%, which are the assumptions they use to get that number). On the other hand, human investment advisors are generating FUD about tax-loss harvesting[1][2], because they want to discourage people from requesting that service.
I feel like the best thing to do is put your money into wealthfront, enjoy the tax loss harvesting and portfolio rebalancing while the portfolio stabilizes and then about 4 months after deposit, transfer your account entirely to vanguard. Wealthfront (under 100k) just uses available index funds as investments anyway.
The securities appeared in my Fidelity account, and the cost basis information populated a few days later. It also doesn't trigger a taxable event, and there were no fees for transferring out of Wealthfront.
I transfered my account TO wealthfront and that was easy, now I'm thinking it's time to do what I've described and I'm assuming it's not challenging. Does wealthfront do anything to prevent you from leaving easily?
I've heard the challenge is that since they buy individual stocks, and constantly change the holdings, it isn't easy to keep changing that and you'll be stuck with whatever stocks you had last and can just rebalance within those. I could be making that up though.
That's accurate if you are doing tax optimized direct indexing (https://www.wealthfront.com/tax-optimized-direct-indexing) which doesn't involve just using index funds. Their basic level of service just involves purchasing index funds.
I guess you could do it yourself if you can do commission free trades in the ETFS they use, but that's a fair amount of work to monitor the market and execute the optimal tax loss harvesting trades (or at least good enough trades to get you to at least 3k) and do the re-balancing math. Wealthfront charges 0.25% a month so I guess it depends on how much you are investing if you think it's not worth it.
One reason you might choose a robo over just ETFs is more financial planning information. Both Betterment and Wealthfront offer goal-setting or projection features to help you stay on track for retirement or whatever other savings goals you have. But if you're worried about the fee, check out WiseBanyan (https://wisebanyan.com/), which offers free goal-setting assistance but doesn't have any additional fees on top of the built-in expense ratios.
Disclosure: I work with numbers at WiseBanyan. Our business model charges a la carte for extra services (tax loss harvesting, for example), so you basically pay for what you actually want.
If you want more options, you can also move to one of the brokers like TDA. They provide commission free trades for 100 or so ETFs [1], many of which are Vanguards. If you really felt like replicating Wealthfront or Betterment, you can come really close with the commission free ETFs offered. It's all about how much work you want to do on your own.
I've always wondered if there is a difference between the ETF version of the Vanguard funds and going directly to Vanguard. For the few I looked at it seemed like the ETFs had lower expense ratios and no minimum funding requirements.
The ETF expense ratios are lower, but you'll pay a couple basis points of spread to buy and another couple basis points to sell[1].
If you have enough money (typically $10k) to invest, then you can buy the Admiral Shares of the mutual fund, which has the same expense ratio as the ETF, but won't require you to pay a bid-ask spread to buy or sell.
If you start with the Investor Shares and end up with more than $10k in the fund eventually, you can always convert them up to Admiral Shares without tax implications. You can't convert ETF to Admiral Shares without selling though.
If you don't think you'll have $10k in the fund anytime soon, then the ETF is likely the cheaper option. However, the difference is practically really small - for a $9000 investment, you'll pay $4.50 per year in expenses for the VTI ETF vs. $14.40 for the VTSMX fund.
I worked as a vendor to money managers for many years (Vanguard was one of our bigger customers) and am familiar with the industry.
The conclusion most of my colleagues have come to is the roboadvisors don't really offer much beyond Vanguard target date funds. The roboadvisors seem to be failing to acquire significant assets.
More importantly, with their low fees, they need massive AUM to ever be profitable. There is a reason Personal Capital is making more than WF/BM by analysis I've read.
For certain index funds, Fidelity is now lower than Vanguard. As of a few months ago, their 500 index and total market index funds are 0.045% compared to vanguard at 0.05%.
Not much of a difference, but it was enough to prompt me to shift my auto deposits from one to the other (still have stuff in both).
Since perryh2 mentioned his 401k, I'll point out that you can't necessarily assume too much as far as the respective branding when you're talking about basis points on these funds from the various companies.
The institutional funds that some 401ks carry can be cheaper than what's available to the general public. I'm pretty sure the Vanguard S&P 500 fund in my 401k is at 0.03%. The government employee Thrift Savings Plan's C fund charges 0.029% for an S&P 500 fund, managed by Blackrock, but I don't think you'll get that as a member of the general public. I'm sure you could find Fidelity and other funds in similar situations.
This is all somewhat relevant since those of us in the US can contribute many more tax-free dollars to our 401ks than our IRAs, sadly.
It's also worth noting that Vanguard's index funds are usually offered to the general public in two share classes: the "Investor" shares, and the "Admiral" shares. The Admiral shares have lower expense ratios, and generally require a $10k minimum investment -- down from something like $50k several years ago.
Some of Vanguard's funds have corresponding ETFs, which hold the exact same investments the funds do, and usually offer the low expense ratio of the Admiral fund shares with no minimum investment.
I think it probably depends on how much you stand to gain from automated tax-loss harvesting: If you don't have the time/skills to do it yourself, strategically selling depreciated stocks (then, potentially, buying them again later) can cancel out a lot of the taxes you'd pay on gains elsewhere in your portfolio. If the Wealthfront fee is less than you save, seems like it'd make sense.
Brokerages with no flat fees like to charge you per-trade, and Schwab requires you to keep some of your contributions in cash so they can skim off the interest. They've all got to make money somehow.
I'm guessing the dedicated robo-advisors will end up being the cheapest services, since they're online only and don't need to keep all those bank buildings and old guys in suits around.
The typical discount broker customer isn't a Robo customer -- they're fishing for people who give some dope in a suit 1% of their assets every year for generic advice and a shoulder to cry on.
I think the calculus for many people, is: i could do this myself pretty easily, but I'd rather pay $200-400/year per $100k not have to do anything than spend X hrs a month dealing with it...
[0] https://www.bogleheads.org/wiki/Bogleheads%C2%AE_investment_...