Self-managed index fund investment vs. robo investment
Oct 1, 2017
7 Comments
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.
comments
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
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 !