The Bogleheads approach is the best approach for the normal investor. Stash it and forget it. Warren Buffett, considered the greatest investor of all time, highly recommends index funds to active investing.
Robo Advisors like Wealthfront are still just advisors, and that means they're just guessing like real-life advisors. And as has been proven time and again, they underperform index funds.
No, Wealthfront and Betterment are not active fund managers. They invest your money in a variety of index funds and rebalance it often. Due to their hugely managed sums they can do a lot of tricks to try to improve your yield while still being broadly diversified.
The only trick they have is tax loss harvesting, which has limited effect (mostly due to $3,000/year limit on deducting). And you can do that by hand pretty easily.
They also reinvest dividends automatically, and rebalance automatically when you add new funds so you aren't over allocated in a particular class of assets.
Tax loss harvesting is limited to 3000 per year, but you can carry over until you've exhausted the losses.
Of course TLH is only good if you're in a taxable account with them.
I also don't buy it being easy- particularly with trying to avoid the pitfalls of wash sales and the paperwork to actually claim it.
The value of which is maybe dubious, as pointed out elsewhere in the thread. It doesn't need to be done frequently, if at all, and is pretty trivial with a simple 3-fund portfolio.
> Tax loss harvesting is limited to 3000 per year, but you can carry over until you've exhausted the losses.
Right. But you only get so many working years.
> Of course TLH is only good if you're in a taxable account with them.
> I also don't buy it being easy- particularly with trying to avoid the pitfalls of wash sales and the paperwork to actually claim it.
You need to be aware of how wash sales work even if you use a robo-advisor to do the TLH. You need to be sure you don't have substantially equivalent securities in your IRAs and 401(k), etc. The actual mechanic is pretty easy — sell one index fund (with shares held over 30 days), buy another extremely similar index (but not the exact same index).
As far as the paperwork — it's imported automatically with Turbotax etc and is exactly the same paperwork as is needed for capital gains.
TLH is also only good while you're working. If you have enough TLH saved up to cover the rest of your working years at $3k/year, you can stop paying the robo-advisor premium.
The problem many investors run into is that they do not like being referred to as "normal" or "average". This makes them susceptible to investing theses that lose money (ie. most of them other than Bogle style investing).
I'm not seeing references to robo advisors, or evidence to support that they underperform direct index funds in either of those two links.
I don't believe said evidence exists, here's why.
First, the robo advisors distribute your money directly against and amongst several index funds.
Second, the money-saving benefits robo advisors provide that direct indexing doesn't, like very frequent automatic rebalancing and automated (aggressive) tax-loss harvesting.
Third, the ability to diversify any amount of money. You can put $1k into Wealthfront and diversify across five Vanguard index funds. But directly on Vanguard, this is impossible because the minimum investment in most Vanguard funds is $3k [0].
With that, take their Total Stock Market Index Fund as an example. If you can only invest $3k in it, your expense ratio is 0.16% [1]. If you can invest $10k in it, your expense ratio is 0.05% [2]. Through Wealthfront, I can hold the VTI ETF at 0.05% expense ratio, which I don't have to pay directly, only indirectly out of the standard Wealthfront fees.
The best possible claim I can imagine then is that for very large accounts, excluding tax-loss harvesting benefits and any benefits of rebalancing, it is cheaper to index invest — for example, if you have a $100k account and can spend less than $225 worth of your time [4] in the entire year keeping up on it, rebalancing if you wish, etc., then in some cases you could beat the robos. The tradeoff of going direct is arguably not free though. I also don't believe this level of investment applies to most people, at least most Americans.
In fact, for accounts under $10k, the Wealthfront fee is zero. I can't think of a good reason why everyone shouldn't take advantage of that.
Tax-loss harvesting has very limited benefit. Mostly you can offset income. But it's only $3k/year. You can harvest enough losses by hand to easily take the $3,000 deduction too.
> Third, the ability to diversify any amount of money. You can put $1k into Wealthfront and diversify across five Vanguard index funds. But directly on Vanguard, this is impossible because the minimum investment in most Vanguard funds is $3k.
No... you can buy the same Vanguard ETFs with no minimum.
> With that, take their Total Stock Market Index Fund as an example. If you can only invest $3k in it, your expense ratio is 0.16% [1]. If you can invest $10k in it, your expense ratio is 0.05% [2]. Through Wealthfront, I can hold the VTI ETF at 0.05% expense ratio
You can just buy VTI as an individual. You still get the 0.05% rate.
> The best possible claim I can imagine then is that for very large accounts, excluding tax-loss harvesting benefits and any benefits of rebalancing, it is cheaper to index invest — for example, if you have a $100k account and can spend less than $225 worth of your time [4] in the entire year keeping up on it, rebalancing if you wish, etc., then in some cases you could beat the robos.
I feel like you may have overlooked some of the nuances in my answer, because I've already specifically pointed out how the robo advisors can be cheaper than buying the indexes directly for a lot of people.
Robo Advisors like Wealthfront are still just advisors, and that means they're just guessing like real-life advisors. And as has been proven time and again, they underperform index funds.
* http://www.investopedia.com/articles/investing/060216/3-reas... * http://finance.yahoo.com/news/buffett-most-mportant-investme...