Author Topic: Betterment $50k "Safety Net"?  (Read 54783 times)

jeromedawg

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Betterment $50k "Safety Net"?
« on: December 04, 2014, 11:30:17 AM »
Hey guys,

I started reading up a little more on how some are using Betterment for their safety nets. It seems this is kind of a controversial topic where the naysayers wouldn't advise *investing* your savings money whereas proponents advise that it's only as risky as you want (or can tolerate) and in the end shouldn't leave you worrying a whole lot. So what's the consensus? I'm assuming it comes down to how comfortable you are with the risk of "investing emergency money" so maybe I'm just answering my own question.

Any pointers on why I should or shouldn't consider this though? I read somewhere that one person stated (or maybe it was based off of advice from Betterment) he would only go this route if he had $12k in SAVINGS, and anything in excess would be the "safety net" - does that make sense? I'm in a position where I think I could maintain a true savings and put down probably around $50k for a 'safety net' investment. I have much more stashed away in other taxable investments with Fidelity in addition to my non-taxable/retirement funds, so it's not like this is the last leg or anything. The reason Betterment is appealing is because there are fewer restrictions on withdrawals and thus easier access to that money in case it becomes "need it now" or "need it soon" money. As far as the fees go, it seems reasonable to pay the .25% when it seems like they take care of A LOT of things that you'd otherwise be worrying about managing yourself. At this point, I think I'd rather prefer to have a "set and forget" it type of investment in Betterment with this shorter-to-mid term money. In fact, as much as I'd like to call it a "safety net" or "rainy day" funds, I'd probably just leave it open and flexible to even become a home down-payment or car fund. Digression: besides Betterment are there other/better of these "robo" management tools out there? Wealthfront? Learnvest? etc? There's so many of these guys that it's hard keeping up with what it is they are or are even offering!

All that said, if it sounds like stashing this $50k in Betterment might be a good idea, what would you suggest my target allocation be?

Thoughts?
« Last Edit: December 04, 2014, 11:32:44 AM by jplee3 »

GGNoob

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Re: Betterment $50k "Safety Net"?
« Reply #1 on: December 04, 2014, 12:02:59 PM »
Betterment suggests a 40/60 allocation: https://www.betterment.com/resources/personal-finance/safety-net-funds-why-traditional-advice-is-wrong/

A place you can do this for free is Wisebanyan.com. You have to refer 5 people to sign up (I referred myself 5 times) or wait until they invite you. However, Wisebanyan doesn't have muni bonds so their account is not as tax efficient as Betterment.

I actually invest my emergency fund at 40% stock and 60% bonds at TD Ameritrade in commission-free ETFs. The 40% stock allocation matches my 100% stock (for retirement) allocation. My retirement allocation is in my signature. Then for the bond portion, I'm 50% SHM and 50% ITM. Because I'm managing this myself, there's a little more work involved. It also takes longer to withdraw money because I have to wait for it to settle. Betterment is great because you can get your money on the 2nd business day as long as the request is made when the market is open. It also makes it incredibly easy because they do all of the rebalancing for you.

My actual emergency fund plan is 1 month's expenses in an online savings account and 3 month's expenses at TD Ameritrade. I keep debating on going with Betterment or Wisebanyan for this to make it simpler. If I did that, I'd just do 100% invested and not worry about the cash (since it'd be just as easy to withdraw money from Wisebanyan or Betterment as it is to get money from an online savings).

My favorite part of investing the emergency fund is that the money is still working for you and you shouldn't have to add money to it as your lifestyle grows. I'm all for investing my emergency fund, but most out there are not.

Beric01

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Re: Betterment $50k "Safety Net"?
« Reply #2 on: December 04, 2014, 12:14:33 PM »
I don't agree with investing in Betterment, but I DO support investing your emergency fund beyond a few thousand cash in the bank. Once you have enough money in the market, even if the market goes down 75%, you're still covered. And in the meantime, your money is working for you. Yes, you'll could possibly end up selling low, but that's better than letting your money sit stagnant (and you could also end up selling high).

jeromedawg

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Re: Betterment $50k "Safety Net"?
« Reply #3 on: December 04, 2014, 12:26:36 PM »
Thanks guys! Beric01, if not Betterment, where might you suggest investing an emergency fund as you were describing? And why are you opposed to Betterment? Is it mostly the fees?

Logan T, I did sign up for Wisebanyan but am on the waiting list. I may consider referring to speed things up. I do agree with the part about making my money continue working and growing but am trying to figure out the best vehicle at this time for it.

GGNoob

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Re: Betterment $50k "Safety Net"?
« Reply #4 on: December 04, 2014, 12:36:05 PM »
This will be worth watching out for when it launches: https://intelligent.schwab.com/

jeromedawg

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Re: Betterment $50k "Safety Net"?
« Reply #5 on: December 04, 2014, 12:54:19 PM »
This will be worth watching out for when it launches: https://intelligent.schwab.com/

Nice! I recently just opened checking and investment accounts with Schwab (mostly so that I would have access to that ATM/Debit card with no foreign transaction fees and fully reimbursable global ATM fees)

Beric01

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Re: Betterment $50k "Safety Net"?
« Reply #6 on: December 04, 2014, 01:04:07 PM »
Thanks guys! Beric01, if not Betterment, where might you suggest investing an emergency fund as you were describing? And why are you opposed to Betterment? Is it mostly the fees?

Betterment is fairly controversial here - rather than making this another Betterment thread I'd suggest reading this one.

I just have all of my money in Vanguard index funds.

GGNoob

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Re: Betterment $50k "Safety Net"?
« Reply #7 on: December 04, 2014, 01:16:14 PM »
This will be worth watching out for when it launches: https://intelligent.schwab.com/

Nice! I recently just opened checking and investment accounts with Schwab (mostly so that I would have access to that ATM/Debit card with no foreign transaction fees and fully reimbursable global ATM fees)

Then Schwab may be a great place to invest your emergency fund. Schwab has the lowest cost ETF's in the industry and also has access to over 100 commission-free ETFs. You could do something similar to me:

28% SCHB (Schwab US Multi-Cap Core)
12% SCHF (Schwab International Multi-Cap Core)
30% SHM (SPDR® Nuveen Barclays Short Term Municipal Bond)
30% TFI (SPDR® Nuveen Barclays Municipal Bond)

This is just an example of an easy 4-fund portfolio you could use at Schwab. The average expense ratio for the above is 0.17%.

pzxc

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Re: Betterment $50k "Safety Net"?
« Reply #8 on: December 04, 2014, 02:10:50 PM »
However the Schwab Intelligent Portfolio says it requires a $50k minimum investment.  That might be too much for an emergency fund for some people.

GGNoob

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Re: Betterment $50k "Safety Net"?
« Reply #9 on: December 04, 2014, 02:11:40 PM »
However the Schwab Intelligent Portfolio says it requires a $50k minimum investment.  That might be too much for an emergency fund for some people.

$50k for tax loss harvesting. I believe the account minimum is only $5,000.

GGNoob

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Re: Betterment $50k "Safety Net"?
« Reply #10 on: December 04, 2014, 02:15:45 PM »
Bogleheads is a great place for investment advice. Here's a recent post on investing your emergency fund and a lot of people gave examples of what they do: http://www.bogleheads.org/forum/viewtopic.php?f=1&t=150947

jeromedawg

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Re: Betterment $50k "Safety Net"?
« Reply #11 on: December 04, 2014, 02:31:56 PM »
Bogleheads is a great place for investment advice. Here's a recent post on investing your emergency fund and a lot of people gave examples of what they do: http://www.bogleheads.org/forum/viewtopic.php?f=1&t=150947

Thanks! I'm reading through it now. BTW: since I'm already investing with Fidelity, would it be advisable just continue with them even with a shorter-term emergency fund? I'm not sure what fund(s) I might want to get if I were to stick with Fidelity (if that's even advisable at all)

GGNoob

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Re: Betterment $50k "Safety Net"?
« Reply #12 on: December 04, 2014, 02:43:06 PM »
Bogleheads is a great place for investment advice. Here's a recent post on investing your emergency fund and a lot of people gave examples of what they do: http://www.bogleheads.org/forum/viewtopic.php?f=1&t=150947

Thanks! I'm reading through it now. BTW: since I'm already investing with Fidelity, would it be advisable just continue with them even with a shorter-term emergency fund? I'm not sure what fund(s) I might want to get if I were to stick with Fidelity (if that's even advisable at all)

Fidelity offers iShares ETF's for free, so you could look into that if you'd like: https://www.fidelity.com/etfs/ishares-view-all

jeromedawg

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Re: Betterment $50k "Safety Net"?
« Reply #13 on: December 04, 2014, 02:51:54 PM »
Wow, I just stumbled across this on Bogleheads... I may consider just doing this! At least with $24k of the money!:

Mango, Union Plus, and Santander are worthwhile if you are willing to jump through the hoops. The best hands off method is:

$5000 in Mango savings
$5000 in Union Plus savings
$50 transfer to/from Mango
$500 transfer to/from Union Plus to avoid $2 fee (5.3% return at the margin for tying up an extra $450 makes it worthwhile)
$1500 transfer to/from Santander, less the amount of your 2 monthly bill payments
$12,050 total

This earns you:
$24 Mango
$20 Union Plus
$20 Santander
-$3 Mango fee
$732 total annually

Overall 6.1% annual return. This is where I keep my emergency fund and I have not had any issues with any of the accounts. If you have a spouse, you might be able to get 6% FDIC insured on $24k. That's a great deal.

pzxc

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Re: Betterment $50k "Safety Net"?
« Reply #14 on: December 04, 2014, 06:59:06 PM »
Oh yeah I read it wrong - the $50k minimum is only for the tax-harvesting part, same as Betterment.  5k minimum for the account then, you say? It doesn't say on the linked page. That's better. (Betterment is no minimum though)

However!
This part gives me pause:

"Schwab affiliates do earn revenue from the underlying assets in SIP accounts. This revenue comes from managing Schwab ETFs and providing services relating to certain third party ETFs that can be selected for the portfolio, and from the cash feature on the accounts."

So basically, since they don't make money from you directly, they will make money by buying Schwab ETFs.
I dunno.
That seems like it doesn't align their interests with yours.
I mean, Schwab ETFs are not like Vanguard's, right?  Ultra-low load because it's really shareholder owned?
So they have a duty to you as manager of your account, but they have financial incentive to buy funds that give them better fees, whereas what it's in your best interest is funds with high performance, which means lower fees.
Classic opposing interests scenario it seems? Am I looking at this wrong?

When you charge direct fees up front like Betterment, the choice of funds to purchase is independent of the revenue stream so there is no financial incentive to skew fund selection away from what will actually perform the best for customers so that customer retention is high... Interests are aligned. (Whether the amount of the fee, 0.15-0.35% for betterment, is actually worth it is another matter. Personally I think it is indeed worth it in some cases but it's debatable regardless)

Hmmm.
If this analysis is correct, it means that Schwab Intelligent Portfolio might be a very bad deal...
(Potentially - I mean even if the fund selection is all reasonable fees now, that doesn't mean they can't invent new funds to buy at whatever fees they want in the future...)
« Last Edit: December 04, 2014, 07:08:24 PM by pzxc »

Radagast

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Re: Betterment $50k "Safety Net"?
« Reply #15 on: December 04, 2014, 07:18:29 PM »
If this analysis is correct, it means that Schwab Intelligent Portfolio might be a very bad deal...
(Potentially - I mean even if the fund selection is all reasonable fees now, that doesn't mean they can't invent new funds to buy at whatever fees they want in the future...)
You have to wait and see what happens when it opens, but I expect the total fees for the underlying ETF's will come out very similar to Betterment's. Perhaps even a fraction lower.

pzxc

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Re: Betterment $50k "Safety Net"?
« Reply #16 on: December 04, 2014, 07:41:30 PM »
How? 90% of betterment's current fund selection are Vanguard funds...
Nobody beats Vanguard...

Or you mean the Schwab ETF load will be lower than the vanguard fees + betterment's 0.25% it puts on top?

Either way, it still incentivizes them to bias towards an asset allocation that makes them more money as opposed to less (whereas betterment makes the same money no matter the allocation).  This is the whole point Vanguard started what he did -- because fund managers will never sell you what makes them the LEAST money -- he wanted to align the interests by making investors in the funds shareholders in the company (by making them the same people, poof! they're aligned)

EDIT:  For example, what if your best interest happened to be an asset allocation that included NO schwab funds at all.  That would result in them making no money at all. Obviously they wouldn't let that persist.  So why would you believe they will play fair in the general case?

You can't let the fox guard the henhouse...
« Last Edit: December 04, 2014, 07:48:32 PM by pzxc »

Dodge

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Re: Betterment $50k "Safety Net"?
« Reply #17 on: December 04, 2014, 10:02:56 PM »
Hey guys,

I started reading up a little more on how some are using Betterment for their safety nets. It seems this is kind of a controversial topic where the naysayers wouldn't advise *investing* your savings money whereas proponents advise that it's only as risky as you want (or can tolerate) and in the end shouldn't leave you worrying a whole lot. So what's the consensus? I'm assuming it comes down to how comfortable you are with the risk of "investing emergency money" so maybe I'm just answering my own question.

Any pointers on why I should or shouldn't consider this though? I read somewhere that one person stated (or maybe it was based off of advice from Betterment) he would only go this route if he had $12k in SAVINGS, and anything in excess would be the "safety net" - does that make sense? I'm in a position where I think I could maintain a true savings and put down probably around $50k for a 'safety net' investment. I have much more stashed away in other taxable investments with Fidelity in addition to my non-taxable/retirement funds, so it's not like this is the last leg or anything. The reason Betterment is appealing is because there are fewer restrictions on withdrawals and thus easier access to that money in case it becomes "need it now" or "need it soon" money. As far as the fees go, it seems reasonable to pay the .25% when it seems like they take care of A LOT of things that you'd otherwise be worrying about managing yourself. At this point, I think I'd rather prefer to have a "set and forget" it type of investment in Betterment with this shorter-to-mid term money. In fact, as much as I'd like to call it a "safety net" or "rainy day" funds, I'd probably just leave it open and flexible to even become a home down-payment or car fund. Digression: besides Betterment are there other/better of these "robo" management tools out there? Wealthfront? Learnvest? etc? There's so many of these guys that it's hard keeping up with what it is they are or are even offering!

All that said, if it sounds like stashing this $50k in Betterment might be a good idea, what would you suggest my target allocation be?

Thoughts?

1.  In my opinion, if you feel you need a $50k "Safety Net", you need to rethink your asset allocation.  Though honestly, the whole concept just reeks of someone trying to sell you something.

2.  If you insist on a safety net, and absolutely don't want to think about anything I'd recommend one of the following:

Total Bond Market Index Admiral Shares - 100% Bonds at 0.08 ER

Short to mid term growth you say?  How about Vanguard Balanced Index Fund Admiral Shares - 60/40 stocks/bonds - 0.09 ER

Both of these funds will automatically rebalance for you, won't charge you any transaction fees for buying/selling, allow for automatic monthly deposits, and let you withdraw it all back to your bank account at any time.

3.  A 0.25 is ridiculously high.  When you combine it with the 0.16 of the underlying funds, you're looking at a 0.41 total expense ratio.  If you're doing Tax Loss Harvesting, this doesn't take into account any extra fees incurred from moving around your 401k to avoid wash sales.  If you compare this to simply putting your money in a bond fund for just 10 years:



The extra fees you'll pay are the equivalent of a 6.25% Load.  If you keep it there for 30 years, you will have spent over half your initial investment in fees.



http://www.begintoinvest.com/expense-ratio-calculator/

Two of the most important things to remember when investing:

1.  Keep your expenses low
2.  Keep it simple
« Last Edit: December 04, 2014, 10:05:29 PM by Dodge »

milesdividendmd

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Betterment $50k "Safety Net"?
« Reply #18 on: December 08, 2014, 03:03:49 AM »
Hey guys,

I started reading up a little more on how some are using Betterment for their safety nets. It seems this is kind of a controversial topic where the naysayers wouldn't advise *investing* your savings money whereas proponents advise that it's only as risky as you want (or can tolerate) and in the end shouldn't leave you worrying a whole lot. So what's the consensus? I'm assuming it comes down to how comfortable you are with the risk of "investing emergency money" so maybe I'm just answering my own question.

Any pointers on why I should or shouldn't consider this though? I read somewhere that one person stated (or maybe it was based off of advice from Betterment) he would only go this route if he had $12k in SAVINGS, and anything in excess would be the "safety net" - does that make sense? I'm in a position where I think I could maintain a true savings and put down probably around $50k for a 'safety net' investment. I have much more stashed away in other taxable investments with Fidelity in addition to my non-taxable/retirement funds, so it's not like this is the last leg or anything. The reason Betterment is appealing is because there are fewer restrictions on withdrawals and thus easier access to that money in case it becomes "need it now" or "need it soon" money. As far as the fees go, it seems reasonable to pay the .25% when it seems like they take care of A LOT of things that you'd otherwise be worrying about managing yourself. At this point, I think I'd rather prefer to have a "set and forget" it type of investment in Betterment with this shorter-to-mid term money. In fact, as much as I'd like to call it a "safety net" or "rainy day" funds, I'd probably just leave it open and flexible to even become a home down-payment or car fund. Digression: besides Betterment are there other/better of these "robo" management tools out there? Wealthfront? Learnvest? etc? There's so many of these guys that it's hard keeping up with what it is they are or are even offering!

All that said, if it sounds like stashing this $50k in Betterment might be a good idea, what would you suggest my target allocation be?

Thoughts?

1.  In my opinion, if you feel you need a $50k "Safety Net", you need to rethink your asset allocation.  Though honestly, the whole concept just reeks of someone trying to sell you something.

2.  If you insist on a safety net, and absolutely don't want to think about anything I'd recommend one of the following:

Total Bond Market Index Admiral Shares - 100% Bonds at 0.08 ER

Short to mid term growth you say?  How about Vanguard Balanced Index Fund Admiral Shares - 60/40 stocks/bonds - 0.09 ER

Both of these funds will automatically rebalance for you, won't charge you any transaction fees for buying/selling, allow for automatic monthly deposits, and let you withdraw it all back to your bank account at any time.

3.  A 0.25 is ridiculously high.  When you combine it with the 0.16 of the underlying funds, you're looking at a 0.41 total expense ratio.  If you're doing Tax Loss Harvesting, this doesn't take into account any extra fees incurred from moving around your 401k to avoid wash sales.  If you compare this to simply putting your money in a bond fund for just 10 years:



The extra fees you'll pay are the equivalent of a 6.25% Load.  If you keep it there for 30 years, you will have spent over half your initial investment in fees.



http://www.begintoinvest.com/expense-ratio-calculator/

Two of the most important things to remember when investing:

1.  Keep your expenses low
2.  Keep it simple

The above analysis is seriously flawed.

While it is true that low fees are one of, if not the most important factor for optimizing any investment strategy, all else being equal, it does not follow that you can compare any 2 approaches and assume they will have identical returns before fees.

Furthermore, even if that were your assumption, then for taxable accounts greater than 50,000 Betterment would generally be a better approach than DIY vanguard due to tax loss harvesting since TLH will on average more than cover the  0.15-0.25% fees.  (this statement is particularly true for high tax bracket individuals, and untrue for those in the 15% tax bracket or lower.)

Also comparing total expenses over 10 years to a 6.25% load completely ignores the compounding effect and the discounted nature of future returns. 

As an example if you assumed a 6.25 % load and started off with $46,874.66 (50,000- your "load") compounded at 7.6 %, after 10 years you would end up with $97,511.25, versus 104,014.22 if you had started off with  the full $50,000. a difference of $6502.97.

But if you start off with 50K in both accounts and compound at 7.52 % for the cheap account, and 7.19 % for the expensive account, you would end up with 103,243.46 in the cheap account versus 100,118.13 in the expensive account.  A difference of 3125.33.

So unless $6502.97 = $3125.33, then an increase of 33 basis points in ER is not in any way equivalent to a 6.25% load.

Finally even if you did assume that both approaches returned an identical 7.6 % arithmetic return, the actual CAGR (ie the actual return) of the Betterment portfolio would generally be higher due to the lower volatility that comes with increased diversification.  (If you disagree, feel free to backtest the sharp ratios of the betterment portfolio compared to your proposed portfolio.)

Betterment vs Vanguard for this purpose is a complex question, but the preceding  analysis was so simple as to be uselsess.  And as the saying goes; garbage in, garbage out....

The OP would be well served by either, and it ends up being a simple matter of preference.

In other words it is wise to keep it simple, but not too simple.
« Last Edit: December 08, 2014, 03:53:00 AM by milesdividendmd »

Dodge

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Re: Betterment $50k "Safety Net"?
« Reply #19 on: December 08, 2014, 06:19:23 PM »
Hey guys,

I started reading up a little more on how some are using Betterment for their safety nets. It seems this is kind of a controversial topic where the naysayers wouldn't advise *investing* your savings money whereas proponents advise that it's only as risky as you want (or can tolerate) and in the end shouldn't leave you worrying a whole lot. So what's the consensus? I'm assuming it comes down to how comfortable you are with the risk of "investing emergency money" so maybe I'm just answering my own question.

Any pointers on why I should or shouldn't consider this though? I read somewhere that one person stated (or maybe it was based off of advice from Betterment) he would only go this route if he had $12k in SAVINGS, and anything in excess would be the "safety net" - does that make sense? I'm in a position where I think I could maintain a true savings and put down probably around $50k for a 'safety net' investment. I have much more stashed away in other taxable investments with Fidelity in addition to my non-taxable/retirement funds, so it's not like this is the last leg or anything. The reason Betterment is appealing is because there are fewer restrictions on withdrawals and thus easier access to that money in case it becomes "need it now" or "need it soon" money. As far as the fees go, it seems reasonable to pay the .25% when it seems like they take care of A LOT of things that you'd otherwise be worrying about managing yourself. At this point, I think I'd rather prefer to have a "set and forget" it type of investment in Betterment with this shorter-to-mid term money. In fact, as much as I'd like to call it a "safety net" or "rainy day" funds, I'd probably just leave it open and flexible to even become a home down-payment or car fund. Digression: besides Betterment are there other/better of these "robo" management tools out there? Wealthfront? Learnvest? etc? There's so many of these guys that it's hard keeping up with what it is they are or are even offering!

All that said, if it sounds like stashing this $50k in Betterment might be a good idea, what would you suggest my target allocation be?

Thoughts?

1.  In my opinion, if you feel you need a $50k "Safety Net", you need to rethink your asset allocation.  Though honestly, the whole concept just reeks of someone trying to sell you something.

2.  If you insist on a safety net, and absolutely don't want to think about anything I'd recommend one of the following:

Total Bond Market Index Admiral Shares - 100% Bonds at 0.08 ER

Short to mid term growth you say?  How about Vanguard Balanced Index Fund Admiral Shares - 60/40 stocks/bonds - 0.09 ER

Both of these funds will automatically rebalance for you, won't charge you any transaction fees for buying/selling, allow for automatic monthly deposits, and let you withdraw it all back to your bank account at any time.

3.  A 0.25 is ridiculously high.  When you combine it with the 0.16 of the underlying funds, you're looking at a 0.41 total expense ratio.  If you're doing Tax Loss Harvesting, this doesn't take into account any extra fees incurred from moving around your 401k to avoid wash sales.  If you compare this to simply putting your money in a bond fund for just 10 years:



The extra fees you'll pay are the equivalent of a 6.25% Load.  If you keep it there for 30 years, you will have spent over half your initial investment in fees.



http://www.begintoinvest.com/expense-ratio-calculator/

Two of the most important things to remember when investing:

1.  Keep your expenses low
2.  Keep it simple

The above analysis is seriously flawed.

While it is true that low fees are one of, if not the most important factor for optimizing any investment strategy, all else being equal, it does not follow that you can compare any 2 approaches and assume they will have identical returns before fees.

Furthermore, even if that were your assumption, then for taxable accounts greater than 50,000 Betterment would generally be a better approach than DIY vanguard due to tax loss harvesting since TLH will on average more than cover the  0.15-0.25% fees.  (this statement is particularly true for high tax bracket individuals, and untrue for those in the 15% tax bracket or lower.)

Also comparing total expenses over 10 years to a 6.25% load completely ignores the compounding effect and the discounted nature of future returns. 

As an example if you assumed a 6.25 % load and started off with $46,874.66 (50,000- your "load") compounded at 7.6 %, after 10 years you would end up with $97,511.25, versus 104,014.22 if you had started off with  the full $50,000. a difference of $6502.97.

But if you start off with 50K in both accounts and compound at 7.52 % for the cheap account, and 7.19 % for the expensive account, you would end up with 103,243.46 in the cheap account versus 100,118.13 in the expensive account.  A difference of 3125.33.

So unless $6502.97 = $3125.33, then an increase of 33 basis points in ER is not in any way equivalent to a 6.25% load.

Finally even if you did assume that both approaches returned an identical 7.6 % arithmetic return, the actual CAGR (ie the actual return) of the Betterment portfolio would generally be higher due to the lower volatility that comes with increased diversification.  (If you disagree, feel free to backtest the sharp ratios of the betterment portfolio compared to your proposed portfolio.)

Betterment vs Vanguard for this purpose is a complex question, but the preceding  analysis was so simple as to be uselsess.  And as the saying goes; garbage in, garbage out....

The OP would be well served by either, and it ends up being a simple matter of preference.

In other words it is wise to keep it simple, but not too simple.

Ouch!  Thanks for checking my math milesdividendmd.  It's just about a 4.3% load, not 6.25%.

For your last objection, I've seen no evidence that past performance predicts future returns, and in terms of total number of assets (the standard definition of diversification) Betterment's portfolio is less diversified, so you and I will never agree on that point.

Honestly, this whole TLH thing just reeks of someone trying to sell you something.  Not you specifically milesdividendmd, it just sounds like a marketing gimmick.  This is the type of stuff I expect from companies trying to maximize profits.  There are a lot of factors to consider here, like tax bracket (as you mentioned), total portfolio ER increases in other accounts in attempts to avoid the wash sale rule...etc.  Let's ignore all that for a moment.

For someone making a single $50,000 deposit, tax loss harvesting will likely provide them no benefit after the first few years.  There will simply be 0 gains to harvest.  To understand how this can happen (for the newbies in the thread, I'm sure you already know where I'm going with this), let's take a look at a typical portfolio growth for someone 100% invested in stocks (Red Line):



As you can see, the investor starting in 1950 had 0 losses to harvest over the lifetime of their investment.  If we look closely, we can see there are a few years where the investor could have been "lucky" by investing at a short-term peak, and therefore had some losses to harvest, but even then it only happened once.  Well, besides the year 2000, where they could've harvested relatively big losses twice, but we'll get to that.

Now let's look at someone 100% invested in bonds over almost the same time period (Orange Line):



Again, 0 losses to harvest over the lifetime of their investment.  As before, there are a few years where you could've been "lucky" but incurring a small temporary loss by investing at the peak, but I wouldn't count on it.  Even if it happens, it won't last long.

Finally, let's look at a portfolio more like what the OP might be looking for, something like a 50/50 or 60/40 allocation (Orange Line):



As expected, putting stocks and bonds together, doesn't really change the calculation much. Looking at the chart, the absolute best time period for Tax Loss Harvesting, was in 2000.  In the year 2000, you will have incurred two bear markets right at the beginning.  Does no one else see a big red flag that it's the year 2000 Betterment choose to start with when explaining their service?

Anyway, let's see how much Tax Loss Harvesting Betterment says would have occurred during this period:



Of course, they can't harvest losses which didn't happen, so once the investment actually has gains (passes the 2000 peak), there is no benefit to Tax Loss Harvesting.  Despite the high likelihood of there being no benefit after just a few years (and possibly no benefit at all ever), the 0.41 ER will continue year, after year, after year.  Considering all this, I wouldn't recommend Betterment for the OP's purpose of a safety net investment.

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Re: Betterment $50k "Safety Net"?
« Reply #20 on: December 08, 2014, 06:35:20 PM »
My Betterment has harvested $2000 of losses in a 90/10 portfolio during 2014. This is during a year when the S&P is up over 10%. Just FYI.

Dodge

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Re: Betterment $50k "Safety Net"?
« Reply #21 on: December 08, 2014, 07:05:00 PM »
My Betterment has harvested $2000 of losses in a 90/10 portfolio during 2014. This is during a year when the S&P is up over 10%. Just FYI.

Great, that sure makes for a catchy selling point.  Two questions for you:

1.  Do you expect the ETFs in your portfolio to go up, past the price of your original purchase, over time?
2.  If so, do you expect your portfolio to continue harvesting losses after that point?

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Re: Betterment $50k "Safety Net"?
« Reply #22 on: December 08, 2014, 07:19:15 PM »
1. Don't know

2. Don't care

Not trying to sell you anything. Good luck!

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Re: Betterment $50k "Safety Net"?
« Reply #23 on: December 08, 2014, 08:20:34 PM »
Of course I'm not claiming that past performance predicts future results.

In contrast your example relies on the explicit assumption that future results of the 2 proposed portfolios will be identical before fees.

I will bet you any amount of money that 10 years from now the before expense (and after expense ratios for that matter) returns of the example portfolios will not be identical.

As to TLH being a gimmick, I can only tell you that in less than 6 months I have personally saved enough in taxes to cover more than 2 years expense ratios. That's real savings and it was effortless. So experience tells me that it is not a gimmick. For me it was unequivocally cheaper than vanguard this year.

Besides all of this betterment is a better user experience than vanguard and even if you take away the betterment fees and features, I believe their portfolio  to be far superior. (Though this is clearly a matter of personal preference....I'm a believer in the size and value premia, and modern portfolio theory. To each his own.)

As to your pictorial analysis, of TLH it ignores the slice and dice nature of the Betterment portfolio. As an example Emerging markets would have been harvested last year in betterment despite the overall growth of the portfolio, with Zero opportunity in the vanguard all in one fund.

Finally note that you could not harvest in only 3 of the 14 years in the Betterment graphic, and you can carry forward losses from earlier years to offset income in future years. So one would have had to be very unlucky indeed not to be able to take advantage of a 50K, lump investment in a betterment stock bond portfolio.

In fact even if you had started in 2005, you would have been able to take a loss in 07 and 08 based on the size of the bear market.

This years 7% sub-correction was not a rare event, in fact the past few years have been abnormally lacking in volatility if anything. (QE perhaps?)

And if you continue to contribute to your taxable account (as most investors do), your ability to really TLH never expires.

Dodge

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Re: Betterment $50k "Safety Net"?
« Reply #24 on: December 08, 2014, 11:47:39 PM »
Of course I'm not claiming that past performance predicts future results.

In contrast your example relies on the explicit assumption that future results of the 2 proposed portfolios will be identical before fees.

I will bet you any amount of money that 10 years from now the before expense (and after expense ratios for that matter) returns of the example portfolios will not be identical.

As to TLH being a gimmick, I can only tell you that in less than 6 months I have personally saved enough in taxes to cover more than 2 years expense ratios. That's real savings and it was effortless. So experience tells me that it is not a gimmick. For me it was unequivocally cheaper than vanguard this year.

Besides all of this betterment is a better user experience than vanguard and even if you take away the betterment fees and features, I believe their portfolio  to be far superior. (Though this is clearly a matter of personal preference....I'm a believer in the size and value premia, and modern portfolio theory. To each his own.)

As to your pictorial analysis, of TLH it ignores the slice and dice nature of the Betterment portfolio. As an example Emerging markets would have been harvested last year in betterment despite the overall growth of the portfolio, with Zero opportunity in the vanguard all in one fund.

Finally note that you could not harvest in only 3 of the 14 years in the Betterment graphic, and you can carry forward losses from earlier years to offset income in future years. So one would have had to be very unlucky indeed not to be able to take advantage of a 50K, lump investment in a betterment stock bond portfolio.

In fact even if you had started in 2005, you would have been able to take a loss in 07 and 08 based on the size of the bear market.

This years 7% sub-correction was not a rare event, in fact the past few years have been abnormally lacking in volatility if anything. (QE perhaps?)

And if you continue to contribute to your taxable account (as most investors do), your ability to really TLH never expires.

You're missing the point.  I understand they won't be identical, but I can't show someone how fees affect the account, if more than one variable is being considered.

I just read the fine print on that Betterment chart, and it's worse than I thought.  Now it makes sense how they were able to tax loss harvest over this time, the portfolio, "deposits twice a month that start at $750 and increase annually by 5%".  Over that 14 year period, the additional contributions totaled $364,423.  Significantly more than the $50,000 initial deposit.  This is the only way to take advantage of the volatility during this time period, as you can't tax loss harvest the same dollar again, unless the previous low is breached.

I don't doubt that tax loss harvesting is possible in the short term.  If you expect each individual ETF in your portfolio to rise over time, however, it will not be there for the long term.  But the higher ER will.  Since the ER is percentage based, this is easily hidden, but let's see if I can highlight it.  Milesdividendmd has saved enough in taxes to cover 2 years of fees.  I presume he means the additional 0.15 ER that Betterment adds on, so let's make it 4 years of fees just in case. let's see what that looks like with a $100,000 deposit, and the worst case scenario (hehe), each ETF individually has an 11.5% yearly growth:

Year 1: $100,000 deposit, market goes up 11.5%, but is volatile enough that tax loss harvesting got you a $600 gain -$310 fee = $111,754
Year 2: 11.5% gain across all ETFs - Account is now $124,220 (after 0.0031% fee), you can no longer tax loss harvest, as there are no losses to harvest.  Current year fee on $124,220= $386
Year 3: 11.5% gain across all ETFs every year from here on out - Account is now $138,076, with a $429 fee
Year 4: $153,477 with a $477 fee
Year 5: $170,597 with a $530 fee
Year 6: $189,626 with a $590 fee
Year 7: $210,777 with a $655 fee
Year 8: $234,288 with a $729 fee
Year 9: $260,421 with a $810 fee
Year 10: $289,469 with a $900 fee (total fees so far = $5,817)
...
Year 20: $833,426 with a $2,592 fee (total fees so far = $22,673)

How is this easily hidden?  It's easily hidden, because if you invest another $100,000 in the second year, and get another $600 tax gain that year, you'd be up big-time!  As far as you can see, each $100,000 invested, nets another $600 gain in taxes.  To visualize this, imagine each $100,000 deposit, as a separate container.  It's really easy to see the gain when your taxes are reduced, but not so easy to see the ER fee.  I suspect this is why many people think they are turning a profit from their mortgage interest tax deduction.  This strategy is essentially laddering you into higher and higher fees, which will never tip back in your favor.  After the second year that each $100,000 container stays in the portfolio, the fees overcome the initial $600 gain, and it's all downhill from there.  You can hide this if you keep depositing, but after a few more years even the $600 gain from that year will be usurped by the overall fees.

Even if you deposit significantly more than your initial deposit (as in the Betterment chart above), that does not affect the fees on the initial $100,000 container, you're just digging yourself deeper.  I charted this out in Excel, hopefully it makes sense:



That's a single $100,000 deposit.  Column A is the account value each year, and Column B is the fee incurred that year, 0.31 ER.  I included a +$600 boost the first year form TLH.  Now let's see what that looks like laddered, if you make the same $100,000 deposit each year, for 6 years:



and calculated the fees incurred:



Long story short, for the OP who will be making a single deposit, the extra fee very much seems to outweigh the gains.  For someone continually making deposits, you're just making it worse.

Note, I attached the excel sheet used to make the calculations.  I'm sure I messed up somewhere, but the overall story shouldn't change.

milesdividendmd

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Re: Betterment $50k "Safety Net"?
« Reply #25 on: December 09, 2014, 01:13:55 AM »
You are again making The elemental mistake of counting future expenses as equivalent to current savings.  A dollar saved now (with TLH) is worth much more than a dollar saved in 20 years (from a 15 basis point expense ratio.)

You are once again forgetting about the elemental importance of compound interest. This is the point that I already made regarding your original flawed statement equating expenses charged over 10 years to an initial load.

The assumptions in the betterment scenario are all quite reasonable.  for most investors saving is a lifelong endeavor, and savings rates go up over time as people get closer to retirement.  This is certainly my plan.

As such for the typical investor tax loss harvesting will be a continual benefit that more than offsets betterments low fees. (Keep in mind that once accounts are over $100,000, the fee drops to 0.15%.)

Over The next 20 years there is some probability that the betterment portfolio will outperform Vanguard, and vice versa.

For an investor who continues to invest his taxable savings in betterment, the fees will usually be lower than Vanguard because of ongoing tax loss harvesting (again dependent on the tax rates during employment and retirement years.)

This fixation on making betterment out to be some nefarious High cost product is totally dependent on straw man arguments and bad math.

It would think it would give you pause that MMM and Mad Fientist have both come to a very different conclusion from you.  (I make no claims about my own wisdom.)

The sad fact is that most investors will underperform both approaches because of behavioral errors, tax decisions, and performance chasing.

Presenting this decision as a black and white choice is nothing more than a distraction.

OP would do very well with either approach.

It just comes down to individual factors and personal preference.

Dodge

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Re: Betterment $50k "Safety Net"?
« Reply #26 on: December 09, 2014, 07:04:37 AM »
You are again making The elemental mistake of counting future expenses as equivalent to current savings.  A dollar saved now (with TLH) is worth much more than a dollar saved in 20 years (from a 15 basis point expense ratio.)

You are once again forgetting about the elemental importance of compound interest. This is the point that I already made regarding your original flawed statement equating expenses charged over 10 years to an initial load.

Nope.  I included the +$600 in the first year of every $100,000 deposit.  The compound interest is fully taking into account the money gained from tax loss harvesting.  It doesn't help, as it is very quickly spent in fees, at the end of the second year in that example.  The concept is quite simple.  A fixed benefit in the beginning, is trumped by a percentage fee later on.  Even if I change the math so you get a full $600 tax benefit for the first 5 years, the percentage still catches up within a few years:



« Last Edit: December 09, 2014, 08:52:31 AM by Dodge »

Dodge

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Re: Betterment $50k "Safety Net"?
« Reply #27 on: December 09, 2014, 11:38:25 PM »
Unfortunately, I made a mistake in the last post.  Even if we assume someone is in a ridiculously high tax bracket, earning $400,000 a year in taxable income, the maximum amount you can get from Tax Loss Harvesting in any one particular year, is $990.  Instead of doing all the calculations over again, here's that last calculation, taking the cap into account:





In short, even if you make six $100,000 deposits, one a year, and have market conditions which allow you to tax loss harvest a +$600 gain each year for the first 5 years, the amount of fees accumulated by the year after your 6th deposit, will be larger than the total amount of tax loss harvesting you will ever accumulate.

milesdividendmd

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Re: Betterment $50k "Safety Net"?
« Reply #28 on: December 10, 2014, 01:24:27 PM »
Say what?  Your assumption here is a real head scratcher.

You can use tax losses to offset $3000 in ordinary income! So assuming a top state/federal income tax rate of 50% that's 1500/year before you offset one dollar in capital gains.

I think it's hilarious that you critique betterment for assuming A 5% increase in taxable contributions per year, and then you model contributing 100,000 a year for 5 years, and then never contributing again!

Who does that?

Talk about cringe worthy assumptions.

Garbage in, garbage out.....

Dodge

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Re: Betterment $50k "Safety Net"?
« Reply #29 on: December 10, 2014, 01:32:46 PM »
Say what?  Your assumption here is a real head scratcher.

You can use tax losses to offset $3000 in ordinary income! So assuming a top state/federal income tax rate of 50% that's 1500/year before you offset one dollar in capital gains.

I assumed the person has a yearly income of $400,000



Changing this to 50% does not significantly change the numbers.  It's a still a loser.

milesdividendmd

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Re: Betterment $50k "Safety Net"?
« Reply #30 on: December 10, 2014, 01:53:05 PM »
That's a 39.6 federal tax rate. Your calculation does not include state income taxes, or short and long term capital gains.

And last time I checked 50% of  $3000 is not $990. (Your stated "maximum you can get from TLH")

But whatever, we all make simple math errors.

The more important point is that Betterment's assumptions are far more reality based than yours.

Your scenario is completely unrealistic for 99.9 % of investors.

Dodge

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Re: Betterment $50k "Safety Net"?
« Reply #31 on: December 10, 2014, 01:53:37 PM »
I think it's hilarious that you critique betterment for assuming A 5% increase in taxable contributions per year, and then you model contributing 100,000 a year for 5 years, and then never contributing again!

Who does that?

Stopping contributions after 5 years puts the numbers more in favor of Betterment.  Contributing more into a strategy that gets an early bump, then loses over the long term, only puts you further behind.  Do it more than a few times, and the losses from the first deposit, are higher than the tax loss benefit from the latest contribution.  In other words, the more you put in, the more behind you get, as the fee is percentage based, and the fee just gets higher.

Adding more to a loser, only makes a bigger loser.  Here's how it looks when you make a deposit once a year, for 10 years:



The fee in year 13 is $8,168, whereas the fee with a DIY Vanguard portfolio for that year would only be $1,839.  I do not recommend continuing to add to this portfolio to gain Tax Loss Harvesting, as even the maximum possible gain is dwarfed by fees.

milesdividendmd

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Re: Betterment $50k "Safety Net"?
« Reply #32 on: December 10, 2014, 02:01:28 PM »
The longer you add the more likely it is that you can TLH at every possibility.

The more you have, the more important it is to have tax efficient deposits and withdrawals from your account.

Plus if you get toThe point where your account is so large that a 0.15% additional fee,is so large that it significantly impacts your portfolio, out of proportion to tax loss harvesting, then you can simply transfer your ETFs holdings to another brokerage with no accounts under management fees.

But the decreased likelihood of you making mistakes and rebalancing, poorly timing the market, and otherwise doing what 99.9% of the investors do will likely make the 0.15% betterment fee well worth the money.

Dodge

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Re: Betterment $50k "Safety Net"?
« Reply #33 on: December 10, 2014, 02:26:42 PM »
But the decreased likelihood of you making mistakes and rebalancing, poorly timing the market, and otherwise doing what 99.9% of the investors do will likely make the 0.15% betterment fee well worth the money.

Compared to a 3 fund DIY portfolio at Vanguard, it's a 0.24% increase.  Since you said 0.15% though, you are indeed comparing Apples to Apples.  Fully Automated at Vanguard vs. Fully Automated at Betterment is a 0.15% difference.  I have yet to see a convincing argument why someone would be more likely to make mistakes with one Fully Automated system vs another.  Can you explain your reasoning?

Now that I think about it, I do remember a compelling argument against Betterment's Fully Automated system:

-------------------
When I'm talking to my Dad, or someone who doesn't know about investing (happens often), it's important to watch my words. If I recommend he move to Betterment, because the tilts have beaten the market in the past, and I believe it will beat the market in the future, that's a dangerous seed to plant. He might, as Ben did above, feel the need to bail out because, "The tilts aren't beating the market anymore, I'm DOWN this year!!!"

Or he might feel the need to bail out, because "I've done some research, and if I put all my money into the Healthcare fund (or your 3X leverage fund), I would have DESTROYED the market over the last 5 years! I'm putting my money there!"

I don't believe the general public, or people who don't know much about the market, will do well with that information. If we recommend they tilt a certain way based on past performance, and the results aren't what they expect ("the TV says the market is up today, but I checked online and my portfolio is DOWN 5%!"), it's natural for them to start thinking about ways to tinker with the formula, which can lead to bailing out at a market low.

Recommending total market index funds, or Vanguard LifeStrategy funds, doesn't have that problem. When recommending this to a friend, I stress this is the best way forward, not because of past performance, but because math. Since you can't know what the future will bring, going with an index (the average) mathematically ensures you will either beat, or match, at least half of all dollars invested in the market.

This is a very different mindset.

...

Indeed, the inclusion of bonds will likely have a tracking effect vs the S&P500, but if you have the right mindset, you won't care.  In my opinion recommending a tilt is a step away from that.

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Re: Betterment $50k "Safety Net"?
« Reply #34 on: December 10, 2014, 02:33:02 PM »
Compelling to whom? 

I am sure that your own arguments are quite compelling to yourself Dodge.

So you've always got that...

milesdividendmd

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Re: Betterment $50k "Safety Net"?
« Reply #35 on: December 10, 2014, 02:37:49 PM »
And if you want to compare apples to apples,

Vanguard's coming roboadvisory service will cost 0.3% AUM, for assets over $100,000. In other words it will be twice the cost of betterment!

https://www.kitces.com/blog/vanguard-personal-advisor-services-vpas-the-first-low-cost-indexing-solution-for-financial-planning-services/

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Re: Betterment $50k "Safety Net"?
« Reply #36 on: December 10, 2014, 03:29:32 PM »
And if you want to compare apples to apples,

Vanguard's coming roboadvisory service will cost 0.3% AUM, for assets over $100,000. In other words it will be twice the cost of betterment!

https://www.kitces.com/blog/vanguard-personal-advisor-services-vpas-the-first-low-cost-indexing-solution-for-financial-planning-services/

This does not refute my position.

milesdividendmd

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Re: Betterment $50k "Safety Net"?
« Reply #37 on: December 17, 2014, 12:04:51 AM »
Just got a nice email message from betterment that they TLH'd another $393.

Another year of fee free investing in the bag.

It would be tough to oversell how happy that makes me. Especially since I had to do exactly nothing to make it happen.

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Re: Betterment $50k "Safety Net"?
« Reply #38 on: December 17, 2014, 03:25:32 AM »
I hear you... I'm up to $2500 harvested for the year. I look at it as getting my dividends for "free" in 2014. At our income levels anything that helps offset the tax burden is a nice bonus.

Dodge

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Re: Betterment $50k "Safety Net"?
« Reply #39 on: December 17, 2014, 07:30:01 AM »
In fact, as much as I'd like to call it a "safety net" or "rainy day" funds, I'd probably just leave it open and flexible to even become a home down-payment or car fund.

To answer your original question, it really doesn't make sense to use Tax Loss Harvesting in this situation.  Tax Loss Harvesting isn't free money, whatever you deduct is owed back when you sell.  If you earn $100,000 a year (28% tax bracket), and get the full $3000 deductible, you'll get $840 back in taxes this year.  However, if you plan on cashing out your investments in 5 years to buy a house/car, while you're still in the 28% tax bracket, you will owe the government an additional $840 in taxes that year.  In other words, while tax loss harvesting doesn’t necessarily produce any net tax savings, it is the equivalent of getting an interest-free loan from the Federal government.



If you invest that $840 back into the Betterment, and get an 11.5% gain for the year, your $840 will have grown to $936, for a profit of $96 from your interest free loan.  Not bad!  And how much will Betterment charge you for this service?  $255.  How much would Vanguard have charged you for a fully automatic "set it and forget it" 60/40 stock/bond fund that handles rebalancing across 10,752 unique assets?  $56

Don't pay $199 to earn $96.  Keep it simple.

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Re: Betterment $50k "Safety Net"?
« Reply #40 on: December 17, 2014, 09:58:46 AM »

In fact, as much as I'd like to call it a "safety net" or "rainy day" funds, I'd probably just leave it open and flexible to even become a home down-payment or car fund.

To answer your original question, it really doesn't make sense to use Tax Loss Harvesting in this situation.  Tax Loss Harvesting isn't free money, whatever you deduct is owed back when you sell.  If you earn $100,000 a year (28% tax bracket), and get the full $3000 deductible, you'll get $840 back in taxes this year.  However, if you plan on cashing out your investments in 5 years to buy a house/car, while you're still in the 28% tax bracket, you will owe the government an additional $840 in taxes that year.  In other words, while tax loss harvesting doesn’t necessarily produce any net tax savings, it is the equivalent of getting an interest-free loan from the Federal government.



If you invest that $840 back into the Betterment, and get an 11.5% gain for the year, your $840 will have grown to $936, for a profit of $96 from your interest free loan.  Not bad!  And how much will Betterment charge you for this service?  $255.  How much would Vanguard have charged you for a fully automatic "set it and forget it" 60/40 stock/bond fund that handles rebalancing across 10,752 unique assets?  $56

Don't pay $199 to earn $96.  Keep it simple.

This is terrible analysis for almost any mustachian.

Obviouslyin most cases your marginal tax rate at peak earning will be higher than your marginal tax rate in retirement.

Furthermore, even mediocre tax planning will get you to a 15% earned income bracket or less during retirement,meaning you will have no long-term capital gains liabilities in retirement!l.

So money save now is never lost later if you have any intelligence in tax planning.

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Re: Betterment $50k "Safety Net"?
« Reply #41 on: December 17, 2014, 10:04:30 AM »

In fact, as much as I'd like to call it a "safety net" or "rainy day" funds, I'd probably just leave it open and flexible to even become a home down-payment or car fund.

To answer your original question, it really doesn't make sense to use Tax Loss Harvesting in this situation.  Tax Loss Harvesting isn't free money, whatever you deduct is owed back when you sell.  If you earn $100,000 a year (28% tax bracket), and get the full $3000 deductible, you'll get $840 back in taxes this year.  However, if you plan on cashing out your investments in 5 years to buy a house/car, while you're still in the 28% tax bracket, you will owe the government an additional $840 in taxes that year.  In other words, while tax loss harvesting doesn’t necessarily produce any net tax savings, it is the equivalent of getting an interest-free loan from the Federal government.



If you invest that $840 back into the Betterment, and get an 11.5% gain for the year, your $840 will have grown to $936, for a profit of $96 from your interest free loan.  Not bad!  And how much will Betterment charge you for this service?  $255.  How much would Vanguard have charged you for a fully automatic "set it and forget it" 60/40 stock/bond fund that handles rebalancing across 10,752 unique assets?  $56

Don't pay $199 to earn $96.  Keep it simple.

This is terrible analysis for almost any mustachian.

Obviouslyin most cases your marginal tax rate at peak earning will be higher than your marginal tax rate in retirement.

Furthermore, even mediocre tax planning will get you to a 15% earned income bracket or less during retirement,meaning you will have no long-term capital gains liabilities in retirement!l.

So money save now is never lost later if you have any intelligence in tax planning.

This thread is about using a $50,000 "Safety Net" which will be used:

to even become a home down-payment or car fund.

Not retirement.

milesdividendmd

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Re: Betterment $50k "Safety Net"?
« Reply #42 on: December 17, 2014, 10:27:17 AM »
Right. So let's say you need to withdraw 10K to fix your roof.

Betterment will automatically withdraw your 10K from the funds with the highest cost basis (ie the funds that have the least delta between their basis and their current value. )

Compare this to a target date fund of funds where you will be taxed on every penny of appreciation above your basis.

Betterment is much more efficient.

If your question is whether to invest a safety net at all, that's one thing, but if you are arguing that  Betterment with TLH is less efficient than an all in one fund, that's simply nonsense. It is the opposite of true.

Dodge

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Re: Betterment $50k "Safety Net"?
« Reply #43 on: December 17, 2014, 11:44:20 AM »
Right. So let's say you need to withdraw 10K to fix your roof.

Betterment will automatically withdraw your 10K from the funds with the highest cost basis (ie the funds that have the least delta between their basis and their current value. )

Compare this to a target date fund of funds where you will be taxed on every penny of appreciation above your basis.

Betterment is much more efficient.

If your question is whether to invest a safety net at all, that's one thing, but if you are arguing that  Betterment with TLH is less efficient than an all in one fund, that's simply nonsense. It is the opposite of true.

Withdrawing from the funds with the highest cost basis first does not change the numbers presented.

Dodge

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Re: Betterment $50k "Safety Net"?
« Reply #44 on: December 17, 2014, 12:40:53 PM »
In fact, as much as I'd like to call it a "safety net" or "rainy day" funds, I'd probably just leave it open and flexible to even become a home down-payment or car fund.

To answer your original question, it really doesn't make sense to use Tax Loss Harvesting in this situation.  Tax Loss Harvesting isn't free money, whatever you deduct is owed back when you sell.  If you earn $100,000 a year (28% tax bracket), and get the full $3000 deductible, you'll get $840 back in taxes this year.  However, if you plan on cashing out your investments in 5 years to buy a house/car, while you're still in the 28% tax bracket, you will owe the government an additional $840 in taxes that year.  In other words, while tax loss harvesting doesn’t necessarily produce any net tax savings, it is the equivalent of getting an interest-free loan from the Federal government.



If you invest that $840 back into the Betterment, and get an 11.5% gain for the year, your $840 will have grown to $936, for a profit of $96 from your interest free loan.  Not bad!  And how much will Betterment charge you for this service?  $255.  How much would Vanguard have charged you for a fully automatic "set it and forget it" 60/40 stock/bond fund that handles rebalancing across 10,752 unique assets?  $56

Don't pay $199 to earn $96.  Keep it simple.

The problem with your analysis is that when you "cash out" the investments in 5 years, they will be long-term holdings, so you will pay the long-term capital gains tax rate of 15%, not your earned income marginal tax rate of 28%. In other words, by deferring the tax for 5 years, Betterment saved you 13 percentage points of the $3000, or $390 in real tax savings. You can then add that to the $96 for a total of $486 in gross savings as a result of using Betterment. After subtracting the fee of $255, you have a net savings of $198. Looks like Betterment wins in your example.

In fact, despite your claim that it is merely tax deferral, tax loss harvesting usually results in real tax savings so long as you use the losses to offset ordinary income or short-term gains and then don't close the position until it is a long-term holding. Even if your earned income marginal tax rate is the same on both sides, you have real tax savings.

Good point.  But if you're holding for 5 years, and keep getting 11.5% gains (so you are unable to tax loss harvest past the first year), you will end up paying a cumulative $1,419 in fees at Betterment, compared to $310 at Vanguard.

milesdividendmd

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Betterment $50k "Safety Net"?
« Reply #45 on: December 17, 2014, 01:22:17 PM »
In fact, as much as I'd like to call it a "safety net" or "rainy day" funds, I'd probably just leave it open and flexible to even become a home down-payment or car fund.

To answer your original question, it really doesn't make sense to use Tax Loss Harvesting in this situation.  Tax Loss Harvesting isn't free money, whatever you deduct is owed back when you sell.  If you earn $100,000 a year (28% tax bracket), and get the full $3000 deductible, you'll get $840 back in taxes this year.  However, if you plan on cashing out your investments in 5 years to buy a house/car, while you're still in the 28% tax bracket, you will owe the government an additional $840 in taxes that year.  In other words, while tax loss harvesting doesn’t necessarily produce any net tax savings, it is the equivalent of getting an interest-free loan from the Federal government.



If you invest that $840 back into the Betterment, and get an 11.5% gain for the year, your $840 will have grown to $936, for a profit of $96 from your interest free loan.  Not bad!  And how much will Betterment charge you for this service?  $255.  How much would Vanguard have charged you for a fully automatic "set it and forget it" 60/40 stock/bond fund that handles rebalancing across 10,752 unique assets?  $56

Don't pay $199 to earn $96.  Keep it simple.

The problem with your analysis is that when you "cash out" the investments in 5 years, they will be long-term holdings, so you will pay the long-term capital gains tax rate of 15%, not your earned income marginal tax rate of 28%. In other words, by deferring the tax for 5 years, Betterment saved you 13 percentage points of the $3000, or $390 in real tax savings. You can then add that to the $96 for a total of $486 in gross savings as a result of using Betterment. After subtracting the fee of $255, you have a net savings of $198. Looks like Betterment wins in your example.

In fact, despite your claim that it is merely tax deferral, tax loss harvesting usually results in real tax savings so long as you use the losses to offset ordinary income or short-term gains and then don't close the position until it is a long-term holding. Even if your earned income marginal tax rate is the same on both sides, you have real tax savings.

Good point.  But if you're holding for 5 years, and keep getting 11.5% gains (so you are unable to tax loss harvest past the first year), you will end up paying a cumulative $1,419 in fees at Betterment, compared to $310 at Vanguard.

You only need to hold for 1 year to get the tax benefit, not 5 years. I only said 5 years in the original version of my post because of how you wrote "5 years" in your post. However, despite you writing "5 years", your example was written for 1 year, and in the 1 year case, Betterment wins.

Betterment may win in the 5 year case as well, because the analysis becomes a lot more complicated over the 5 year horizon, and is not anywhere near as simple as what you just said.

+1

It's almost as if Dodge is hell-bent on coming up with unrealistic scenarios to prove a point that he wishes to be true.

Here is a simple point. Based on the amount of tax loss harvesting that betterment has already performed for me in the last six months,and my tax bracket, my expenses at betterment will be cheaper than the same amount of money invested at Vanguard for the next three years.

Simple fact.

Dodge

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Re: Betterment $50k "Safety Net"?
« Reply #46 on: December 17, 2014, 01:50:07 PM »
In fact, as much as I'd like to call it a "safety net" or "rainy day" funds, I'd probably just leave it open and flexible to even become a home down-payment or car fund.

To answer your original question, it really doesn't make sense to use Tax Loss Harvesting in this situation.  Tax Loss Harvesting isn't free money, whatever you deduct is owed back when you sell.  If you earn $100,000 a year (28% tax bracket), and get the full $3000 deductible, you'll get $840 back in taxes this year.  However, if you plan on cashing out your investments in 5 years to buy a house/car, while you're still in the 28% tax bracket, you will owe the government an additional $840 in taxes that year.  In other words, while tax loss harvesting doesn’t necessarily produce any net tax savings, it is the equivalent of getting an interest-free loan from the Federal government.



If you invest that $840 back into the Betterment, and get an 11.5% gain for the year, your $840 will have grown to $936, for a profit of $96 from your interest free loan.  Not bad!  And how much will Betterment charge you for this service?  $255.  How much would Vanguard have charged you for a fully automatic "set it and forget it" 60/40 stock/bond fund that handles rebalancing across 10,752 unique assets?  $56

Don't pay $199 to earn $96.  Keep it simple.

The problem with your analysis is that when you "cash out" the investments in 5 years, they will be long-term holdings, so you will pay the long-term capital gains tax rate of 15%, not your earned income marginal tax rate of 28%. In other words, by deferring the tax for 5 years, Betterment saved you 13 percentage points of the $3000, or $390 in real tax savings. You can then add that to the $96 for a total of $486 in gross savings as a result of using Betterment. After subtracting the fee of $255, you have a net savings of $198. Looks like Betterment wins in your example.

In fact, despite your claim that it is merely tax deferral, tax loss harvesting usually results in real tax savings so long as you use the losses to offset ordinary income or short-term gains and then don't close the position until it is a long-term holding. Even if your earned income marginal tax rate is the same on both sides, you have real tax savings.

Good point.  But if you're holding for 5 years, and keep getting 11.5% gains (so you are unable to tax loss harvest past the first year), you will end up paying a cumulative $1,419 in fees at Betterment, compared to $310 at Vanguard.

You only need to hold for 1 year to get the tax benefit, not 5 years. I only said 5 years in the original version of my post because of how you wrote "5 years" in your post. However, despite you writing "5 years", your example was written for 1 year, and in the 1 year case, Betterment wins.

Betterment may win in the 5 year case as well, because the analysis becomes a lot more complicated over the 5 year horizon, and is not anywhere near as simple as what you just said.

Beginning of year 1: Deposit $50,000, +11.5% growth - $229 fee = $55,521
Beginning of year 2: Get +$840 from tax return + 11.5% growth - $258 fee = $62,584

We have now held for one year.  Instead of owing $840, I owe 450, so my total is $62,134.

Compared to Vanguard:

Beginning of year 1: Deposit $50,000, grows to $55,750, minus $50 fee = $55,700
Beginning of year 2: 11.5% growth - $55 fee = $62,050

Yes, at this point Betterment's tax loss harvesting would have increased the portfolio by $84, you are correct.  But what happens in year 3?  If you can't keep tax loss harvesting, which Betterment's own data shows they can't, the fees will usurp the advantage.


brooklynguy

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Re: Betterment $50k "Safety Net"?
« Reply #47 on: December 17, 2014, 02:38:55 PM »
Here is a simple point. Based on the amount of tax loss harvesting that betterment has already performed for me in the last six months,and my tax bracket, my expenses at betterment will be cheaper than the same amount of money invested at Vanguard for the next three years.

Simple fact.

This assumes you would have harvested zero losses in your Vanguard account, but there have been some easy opportunities for manual tax loss harvesting this year.

milesdividendmd

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Re: Betterment $50k "Safety Net"?
« Reply #48 on: December 17, 2014, 02:43:56 PM »
Tough to harvest in a "fund of funds" account, which Dodge advocates as a cheaper alternative to Betterment, because everything has to go down not just some components.

Also I am quite confident that I would not have harvested $1000 on 60K invested in the past 6 months were I invested in a taxable slice and dice portfolio. That would require constant monitoring and constant vigilance.

Computers are much better at that sort of thing.....

brooklynguy

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Re: Betterment $50k "Safety Net"?
« Reply #49 on: December 17, 2014, 03:06:31 PM »
Yes, to exploit harvesting opportunities, it's better to hold the individual funds directly rather than a "fund of funds."

Depending on when your investments were made, a harvest of 1.6% of your principal this year would have been pretty easy to achieve without much work or monitoring.  You paid Betterment's computers to do it for you, which is fine but less consistent with the mustachian ethos, but admittedly it is also only true looking back with 20/20 hindsight -- in periods of low volatility, Betterment's computers will be able to tax loss harvest when we mere humans cannot.

 

Wow, a phone plan for fifteen bucks!