Self-managed index fund investment vs. robo investment
I have a self-managed 3-fund index fund portfolio in vanguard, and a small investment at wealthfront with risk score of 9. While vanguard index funds have lower expense ratios, wealthfront provides tax-loss harvesting which can close the gap. Is there any analysis or pointers to the comparison two methods of investment? While 0.25% expense ratio of wealthfront seems high, i‘m not sure if tax-loss harvesting will pay off.
I have similar problem, really depends on how much $ is in there. In a $200,000 portfolio paying the $500 annual Wealthfront fee and taking advantage of Wealthfront is quite worth it, since you can easily harvest 28+9% of $3,000 ordinary income losses per year. At a different scale, Vanguard + manual TLH is probably better. But is it worth the small fee to rebalance more and not let your portfolio get out of whack due to inattention (the typical real problem of investing)? However, the 1% claimed tax alpha of Wealthfront is vastly exaggerated and unlikely to show itself in reality, you likely won't have many short term capital gains so you'll be limited to $3,000 of losses harvested at say 37% for a $1,000 savings cap per year. There are lots of analyses back and forth about whether it's worth it. I'll post three of the best (critical) ones I've read: https://earlyretirementnow.com/2016/03/25/be-your-own-diy-zero-cost-robo-adviser/ https://www.kitces.com/blog/evaluating-the-tax-deferral-and-tax-bracket-arbitrage-benefits-of-tax-loss-harvesting/ https://www.advisorperspectives.com/articles/2014/08/12/the-tax-harvesting-mirage One thing is Wealthfront hasn't been long for that long and we don't know how they'll perform in a bad bear market. For instance if they keep rebalancing daily during a massive market crash that could actually end up worse than quarterly or annual rebalancing, "catching falling knife" effect. I'm going to split Wealthfront and DIY and see how both do, but the lazy temptation is to do all one or another
I find it funny that the first article you shared says that it's very easy to replicate the robo advisor features (like TLH). But then it goes pages after pages on how to do it and point out tons of things to be careful. I know you can probably DIY and save 0.25% but man I find it convenient to let computers do it for me :)
Some more thoughts. If you're strictly thinking about how you can avoid the 0.25% of most robo advisors, I think you will succeed at finding ways to replicate what they do for free. That is if you assume that you don't need daily rebalancing or daily TLH. Even though I'm not convinced daily TLH or daily rebalancing will make up that fee I would still think Wealthfront or Betterment are still worth considering., In my case I value my time a lot and even though I love personal finances, I don't want to.end up having to spend hours per week or month. For that reason, I see the 0.25% fee as a convenience fee. I do get your point though that as you get into (say) 500,000+, that convenience becomes expensive. Betterment has things like fractional shares which means you never have sitting cash. They also have coordinated portfolio, meaning that you can have a taxable account, a Roth IRA, a traditional IRA all coordinated. That means that your overall stock/bonds target is globally respected but tax inneficient assets can be put in your Roth and so on. They also keep track of all your tax lots and will ensure your widhtdrawals are tax optimized for you. Again, all things you can DIY but that is a LOT of convenience !
BTW what is your 3 fund Vanguard portfolio?
I have US stock (vtsax), international stock (vtiax), and US bonds (vbtlx), 60:20:20.
Thank you all for great points and pointers.
The 2 strategies are probably very similar. I assume that you don't pay commissions in your vanguard account, right? I think TLH yields probably just enough to offset the WF fees. But I think WF has more advantages though. Like smart dividends reinvestment, possibly direct indexing, help on minimizing taxes on withdrawals, automatic rebalancing and more.