So Indexer asks 'Why bother?' with the robo investment account?
Well, I have definitely read MMM's posts regarding robo accounts... such as this one:
http://www.mrmoneymustache.com/2017/02/01/betterment-cranks-up-features-and-costs-is-it-still-worthwhile/
And his analysis is that their tax loss harvesting alone makes up for the fee. I currently pay 0.25% fee for Wealthfront. But I also have direct indexing, which allows me to own many types of equities without using an ETF or paying the ETF fees.
Do you think MMM's analysis is wrong Indexer?
In short, yes, I think his analysis might be leaving out a very important detail. When you harvest a loss you are also harvesting your own cost basis. When you sell the new holding in the future at a gain your capital gains will be greater than they would have been if you hadn't harvested the earlier loss. The benefit is that you can reinvest the tax savings between now and the future date where you sell the holding. Your benefit will be inflated during the time between harvesting the loss and realizing the larger gain in the future. If you only report the initial benefit then you are distorting TLH and making it look better than it really is.
If you dig into Betterment's disclosures you will see what I mean.
https://www.betterment.com/tax-loss-harvesting/ (Click on "About this data" under the chart.)
According to Betterment, if you TLH and never sell the holding in the future, then TLH can increase annual returns by 1.4%.
If you TLH and only sell 50% of the holding then TLH can increase annual returns by 0.77%.
They don't share data on the returns if you sold the entire position. Seriously, why? The one scenario they never disclose is the most important one. However, let me point out that selling half of the position decreased the benefit by 0.63%(1.4-.77), which is almost half of the original benefit. Following that trend, selling 100% of the position would remove 1.26% of the benefit. That only leaves 0.14%(1.4-1.26). 0.14% is a far cry from their advertised benefit.
I believe the benefit is greater than that, but I'm having a hard time finding any data on the final benefit of TLH after accounting for selling the holding. I also question why both Betterment and Wealthfront chose 2000 as their starting point for their backtests. They chose the start of a market crash for measuring the benefits of TLH. I imagine the benefit wouldn't be as great if they started the test in 1995.
TLH is also most beneficial after a big drop, but once the market recovers it becomes less and less beneficial. If you harvested losses in March, 2009 then it's highly unlikely you are ever going to harvest a loss on those holdings ever again. However, if Betterment is managing that account then you are still paying them a management fee.
Conclusion: I see a benefit to harvesting a loss, but I don't think these robo TLH programs are nearly as beneficial as they pretend to be. If the market crashes I can harvest losses. I don't need to look at it everyday. It's normally pretty clear when we are experiencing a correction. Pay attention to it then.
Side note: I didn't realize you were referring to Wealthfront's account that mimicks the SP500. I thought you were talking about Betterment or Wealthfront's standard TLH. That account that mimicks the SP500 is pretty nifty and I haven't decided how I really feel about it yet. It might be my exception to the earlier complaints about TLH return reporting.
Other considerations: If someone never sold the holding they would see a bigger benefit, but a tax efficient spending strategy in FIRE(especially if you FIRE before 59 1/2) would involve spending taxable accounts first. You could also sell at a 0% LTCG bracket if that applies. The Government could put an end to TLH or raise capital gains taxes. Versions of the recent tax bill including FIFO only rules for investment trades which would have made TLH much more difficult.
