Author Topic: Betterment  (Read 18597 times)

dalekeener

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Betterment
« on: October 16, 2015, 01:06:18 PM »
Just curious, I have listened to some financial podcasts recommending using Betterment as a good source to invest some of your portfolio....Has anyone used them and what is anyone's opinion?

Thanks,

Dale

Jeremy E.

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Re: Betterment
« Reply #1 on: October 16, 2015, 01:26:37 PM »
I feel safer using a Vanguard account because of the reasons outlined in this article,
http://jlcollinsnh.com/2012/09/07/stocks-part-x-what-if-vanguard-gets-nuked/
The main reason being that Vanguard is owned by it's investors and will always have the lowest possible expense ratios. The owners of Betterment could change their rates, or sell the company to someone that can change their rates. Not that I think this will happen, but it's certainly possible.

Eric

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Re: Betterment
« Reply #2 on: October 16, 2015, 03:12:27 PM »
This has been discussed at length many many times.  Try this search for a bunch of other threads:

https://www.google.com/?gws_rd=ssl#q=site:http://forum.mrmoneymustache.com/investor-alley/+betterment&start=0

The TL;DR version is that it's not that hard to set up your own asset allocation using broad index funds, and of course it's cheaper.  However, if you're unwilling to do that work yourself, betterment is a decent choice if you're going to voluntarily part with your money to have someone else manage it.

GGNoob

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Re: Betterment
« Reply #3 on: October 17, 2015, 10:15:40 AM »
This has been discussed at length many many times.  Try this search for a bunch of other threads:

https://www.google.com/?gws_rd=ssl#q=site:http://forum.mrmoneymustache.com/investor-alley/+betterment&start=0

The TL;DR version is that it's not that hard to set up your own asset allocation using broad index funds, and of course it's cheaper.  However, if you're unwilling to do that work yourself, betterment is a decent choice if you're going to voluntarily part with your money to have someone else manage it.

But even when you don't want to set up and manage your own asset allocation, you can use Vanguard Target Retirement Date or Lifestrategy funds and save on overall fees.

Personally, I recommend new investors to Betterment because it is incredibly easy to use. I also find their advice and articles are very useful to new investors who otherwise wouldn't go out and find advice/info on their own. I just always make sure to tell them that they should not start investing at Betterment unless they can transfer at least $100 a month to avoid the $3 per month fee (for accounts under $10k).

rmendpara

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Re: Betterment
« Reply #4 on: October 17, 2015, 07:27:19 PM »
It's a fair price for people who do not want to learn and/or make the effort to stay on top of their investments.

This has been discussed at length before, so search for previous thoughts. It is a service for a fee. Nothing special about it that you cannot do yourself. Same as mowing your lawn and cleaning the house. Can certainly be done yourself, but depends on how much you value your time.

As your portfolio grows into the hundreds of thousands, the fees will become much more meaningful, though much less than most traditional advisers in the 0.75%+ fee range. It's certainly worth your time and effort to learn the basics, as what Betterment does can be learned through some basic education.

milesdividendmd

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Re: Betterment
« Reply #5 on: October 17, 2015, 08:04:36 PM »
As mentioned above this topic has been hashed out ad nauseum before.

Suffice to say there is another side to the argument. And that side is that Betterment is a far superior product to target date funds in terms of portfolio construction.

And if we're talking about taxable accounts Betterment is quite often much cheaper too after tax loss harvesting.

AmandaS1989

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Re: Betterment
« Reply #6 on: October 19, 2015, 01:36:01 PM »
I invested with Betterment simply due to the fact that they did not have a minimum to open an account like Vanguard. If you don't have $1000 to get started with, you can use Betterment until you reach that amount and then you can move the account to Vanguard if you like. Another thing I like about it is the fact that they will re-balance the portfolio for me. I have no idea how to do that kind of stuff so its great that they do it for me.

If you do go with Betterment, just make sure you can afford to contribute $100 min per month on auto-deposit to avoid the $3 per month fee.

BarkyardBQ

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Re: Betterment
« Reply #7 on: October 19, 2015, 01:39:52 PM »
If you do go with Betterment, just make sure you can afford to contribute $100 min per month on auto-deposit to avoid the $3 per month fee.

How is that any better than buying 1 share of VTI every month for free and a .05% ER?

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Re: Betterment
« Reply #8 on: October 19, 2015, 02:10:01 PM »
Schwab also has no minimum and has its own ETFs that you can buy and sell with no commission, so rebalancing is free. Their ERs are trivially lower than comparable Vanguard ERs.

AmandaS1989

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Re: Betterment
« Reply #9 on: October 19, 2015, 02:54:34 PM »
If you do go with Betterment, just make sure you can afford to contribute $100 min per month on auto-deposit to avoid the $3 per month fee.

How is that any better than buying 1 share of VTI every month for free and a .05% ER?


I'm not saying it is. I just got started through Betterment since I didn't have $1000 to get started with Vanguard and didn't want to wait until next summer to get started investing. Once you do start a Vanguard account you could buy a share of VTI every month if you wanted. That's not very diversified though. But to each his/her own.

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Re: Betterment
« Reply #10 on: October 19, 2015, 07:41:35 PM »
Just curious, I have listened to some financial podcasts recommending using Betterment as a good source to invest some of your portfolio....Has anyone used them and what is anyone's opinion?

Thanks,

Dale

Definitely go read all the previous threads on Betterment. I was interested in Betterment, even opened an account and started investing. After reading the threads, however, I RAN (not walked) to Vanguard. Now I get 100% of the benefits, without any of the cons, and it's cheaper to boot!

Betterment is just a middle-man between you and Vanguard. Don't waste your time.

tj

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Re: Betterment
« Reply #11 on: October 19, 2015, 08:00:39 PM »
Just curious, I have listened to some financial podcasts recommending using Betterment as a good source to invest some of your portfolio....Has anyone used them and what is anyone's opinion?

Thanks,

Dale

Definitely go read all the previous threads on Betterment. I was interested in Betterment, even opened an account and started investing. After reading the threads, however, I RAN (not walked) to Vanguard. Now I get 100% of the benefits, without any of the cons, and it's cheaper to boot!

Betterment is just a middle-man between you and Vanguard. Don't waste your time.

Disagree. Betterment TLHed me over $7500 this year, yet it hasn't lost $$$. Nor have I paid a fee.

milesdividendmd

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Re: Betterment
« Reply #12 on: October 19, 2015, 08:38:22 PM »

Just curious, I have listened to some financial podcasts recommending using Betterment as a good source to invest some of your portfolio....Has anyone used them and what is anyone's opinion?

Thanks,

Dale

Definitely go read all the previous threads on Betterment. I was interested in Betterment, even opened an account and started investing. After reading the threads, however, I RAN (not walked) to Vanguard. Now I get 100% of the benefits, without any of the cons, and it's cheaper to boot!

Betterment is just a middle-man between you and Vanguard. Don't waste your time.

Disagree. Betterment TLHed me over $7500 this year, yet it hasn't lost $$$. Nor have I paid a fee.

+1

But seriously read the threads!  No reason to rehash it all here.

Do your due diligence, read the collected wisdom of the group, such as it is and get on with it.

You can't go wrong either way.

bryan

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Re: Betterment
« Reply #13 on: October 19, 2015, 09:33:11 PM »
I'm hoping betterment becomes an even more attractive product in the future.. tax gain harvesting, support for different or custom asset allocations (and an easy interface to move in/out either immediately or on some schedule), better tax efficiency and consideration of external assets.

As it stands now I'm still 100% manual with vanguard.

Jeremy E.

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Re: Betterment
« Reply #14 on: October 20, 2015, 10:36:22 AM »
If you do go with Betterment, just make sure you can afford to contribute $100 min per month on auto-deposit to avoid the $3 per month fee.

How is that any better than buying 1 share of VTI every month for free and a .05% ER?


I'm not saying it is. I just got started through Betterment since I didn't have $1000 to get started with Vanguard and didn't want to wait until next summer to get started investing. Once you do start a Vanguard account you could buy a share of VTI every month if you wanted. That's not very diversified though. But to each his/her own.
I think VTI is very diversified, For every share of VTI you have, you own part of every publicly traded company in the US. VTI includes many REITs(HCP, NNN, etc.) as well as many companies that are international companies(apple, exxon, microsoft, etc.) therefore I see no reason to own REITs or International stock separately. Maybe you want to have bonds too(personally with the low return on bonds, I certainly don't), but if you like, you can also buy BND and also BNDX if you wish.

BarkyardBQ

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Re: Betterment
« Reply #15 on: October 20, 2015, 11:15:18 AM »
If you do go with Betterment, just make sure you can afford to contribute $100 min per month on auto-deposit to avoid the $3 per month fee.

How is that any better than buying 1 share of VTI every month for free and a .05% ER?


I'm not saying it is. I just got started through Betterment since I didn't have $1000 to get started with Vanguard and didn't want to wait until next summer to get started investing. Once you do start a Vanguard account you could buy a share of VTI every month if you wanted. That's not very diversified though. But to each his/her own.

$1000 is the minimum investment for Target Date funds. You can open an account and buy 1 ETF share at whatever the price, even <$100

Interest Compound

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Re: Betterment
« Reply #16 on: October 20, 2015, 11:31:13 AM »
Just curious, I have listened to some financial podcasts recommending using Betterment as a good source to invest some of your portfolio....Has anyone used them and what is anyone's opinion?

Thanks,

Dale

Definitely go read all the previous threads on Betterment. I was interested in Betterment, even opened an account and started investing. After reading the threads, however, I RAN (not walked) to Vanguard. Now I get 100% of the benefits, without any of the cons, and it's cheaper to boot!

Betterment is just a middle-man between you and Vanguard. Don't waste your time.

Disagree. Betterment TLHed me over $7500 this year, yet it hasn't lost $$$. Nor have I paid a fee.

Arguing math is always silly. It's a mathematical fact that one of the options will be cheaper. Over the long-term either the TLH + extra Betterment fees will be cheaper than straight Vanguard, or it won't. All the evidence I've seen says it's not even close. Betterment loses. This evidence includes an analysis of the Vanguard ETFs used in Betterment's portfolio, going all the way back to their inception.

If you don't believe the evidence, then great! Put all your money in Betterment. Worse things can happen, it'll probably just cost you a few hundred thousand dollars over your lifetime (which for people on this forum, really isn't much). I just hope you're making your decision based on something more than their marketing material.

milesdividendmd

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Re: Betterment
« Reply #17 on: October 20, 2015, 11:43:55 AM »

If you do go with Betterment, just make sure you can afford to contribute $100 min per month on auto-deposit to avoid the $3 per month fee.

How is that any better than buying 1 share of VTI every month for free and a .05% ER?


I'm not saying it is. I just got started through Betterment since I didn't have $1000 to get started with Vanguard and didn't want to wait until next summer to get started investing. Once you do start a Vanguard account you could buy a share of VTI every month if you wanted. That's not very diversified though. But to each his/her own.
I think VTI is very diversified, For every share of VTI you have, you own part of every publicly traded company in the US. VTI includes many REITs(HCP, NNN, etc.) as well as many companies that are international companies(apple, exxon, microsoft, etc.) therefore I see no reason to own REITs or International stock separately. Maybe you want to have bonds too(personally with the low return on bonds, I certainly don't), but if you like, you can also buy BND and also BNDX if you wish.

VTI is as diversified as you can get for US stocks at large.

But it's not really diversified. It has zero foreign stock exposure. It has no bond and no commodity/precious metals exposure. It is underweight real estate relative to real estate's actual capitalization. It has no exposure to the value, momentum, size, or quality factors.

It's putting all of your eggs in one basket. U.S. Stocks.

So If US stocks do badly going forward, so will you (and vice versa)

I prefer to diversify my risk exposure personally, and invest where evidence suggests there will be increased returns going forward. If these are your preferences, too, than VTI alone is probably not the path forward.

milesdividendmd

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Re: Betterment
« Reply #18 on: October 20, 2015, 11:51:41 AM »

Just curious, I have listened to some financial podcasts recommending using Betterment as a good source to invest some of your portfolio....Has anyone used them and what is anyone's opinion?

Thanks,

Dale

Definitely go read all the previous threads on Betterment. I was interested in Betterment, even opened an account and started investing. After reading the threads, however, I RAN (not walked) to Vanguard. Now I get 100% of the benefits, without any of the cons, and it's cheaper to boot!

Betterment is just a middle-man between you and Vanguard. Don't waste your time.

Disagree. Betterment TLHed me over $7500 this year, yet it hasn't lost $$$. Nor have I paid a fee.

Arguing math is always silly. It's a mathematical fact that one of the options will be cheaper. Over the long-term either the TLH + extra Betterment fees will be cheaper than straight Vanguard, or it won't. All the evidence I've seen says it's not even close. Betterment loses. This evidence includes an analysis of the Vanguard ETFs used in Betterment's portfolio, going all the way back to their inception.

If you don't believe the evidence, then great! Put all your money in Betterment. Worse things can happen, it'll probably just cost you a few hundred thousand dollars over your lifetime (which for people on this forum, really isn't much). I just hope you're making your decision based on something more than their marketing material.

Old news, old views. Read the old threads and you'll find plenty of evidence for both sides of this argument. It's not a question of "believing the evidence," it's more accurately believing your side of the argument.

The only real evidence is what has already occurred.

Over the past 2 years betterment has been cheaper for me personally in my taxable accounts than vanguard would have been (after TLH.) That's a fact that's irrefutable.

All of those savings are compounding as we speak.

Jeremy E.

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Re: Betterment
« Reply #19 on: October 20, 2015, 12:15:28 PM »

If you do go with Betterment, just make sure you can afford to contribute $100 min per month on auto-deposit to avoid the $3 per month fee.

How is that any better than buying 1 share of VTI every month for free and a .05% ER?


I'm not saying it is. I just got started through Betterment since I didn't have $1000 to get started with Vanguard and didn't want to wait until next summer to get started investing. Once you do start a Vanguard account you could buy a share of VTI every month if you wanted. That's not very diversified though. But to each his/her own.
I think VTI is very diversified, For every share of VTI you have, you own part of every publicly traded company in the US. VTI includes many REITs(HCP, NNN, etc.) as well as many companies that are international companies(apple, exxon, microsoft, etc.) therefore I see no reason to own REITs or International stock separately. Maybe you want to have bonds too(personally with the low return on bonds, I certainly don't), but if you like, you can also buy BND and also BNDX if you wish.

VTI is as diversified as you can get for US stocks at large.

But it's not really diversified. It has zero foreign stock exposure. It has no bond and no commodity/precious metals exposure. It is underweight real estate relative to real estate's actual capitalization. It has no exposure to the value, momentum, size, or quality factors.

It's putting all of your eggs in one basket. U.S. Stocks.

So If US stocks do badly going forward, so will you (and vice versa)

I prefer to diversify my risk exposure personally, and invest where evidence suggests there will be increased returns going forward. If these are your preferences, too, than VTI alone is probably not the path forward.
I don't believe it has zero foreign stock exposure, here is an article that explains why,
http://jlcollinsnh.com/2012/09/26/stocks-part-xi-international-funds-2/
There are multiple precious metals/commodity stocks within VTI. However I don't understand why people like these stocks anyhow, sure precious metals aren't very correlated to the stock market, but that's because stock market values grow a majority of the time whereas precious metals... not so much.
Bonds give crappy returns, who needs em? Get another ETF if you really want them(BND).
Heres another article describing why REITs aren't necessary,
http://jlcollinsnh.com/2014/05/27/stocks-part-xxii-stepping-away-from-reits/
Maybe the real estate stocks in the total stock market might not represent quite as big a chunk of the market as real estate actually does, but you have to remember that most of the companies in the stock market own tons of real estate, and most corporate buildings are much more expensive than residential homes, so it's not as far off as you think.

milesdividendmd

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Re: Betterment
« Reply #20 on: October 20, 2015, 01:09:53 PM »
If you think that the jcollnsnh stock series is represents the summed wisdom of all finance, fair enough.

It's a nice simple primer for beginners, and it's well written but there's a lot missing and a lot of opinion with a paucity of evidence.

It's just one smart guys opinion.

And plenty of smarter guys disagree with his opinions and have actual data to back up their's.

Interest Compound

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Re: Betterment
« Reply #21 on: October 20, 2015, 01:47:00 PM »
Over the past 2 years betterment has been cheaper for me personally in my taxable accounts than vanguard would have been (after TLH.) That's a fact that's irrefutable.

All of those savings are compounding as we speak.

This is consistent with the evidence. Despite the early lead, you lose pretty considerably in the end.

Maybe you're expecting the future to be different than the past, such that TLH will return more than it ever has? Maybe that will happen, maybe not. It was actually one of your posts which pushed me over the edge, causing me to RUN (not walk) from Betterment to Vanguard! So either way, I guess I'll have you to thank :)

milesdividendmd

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Re: Betterment
« Reply #22 on: October 20, 2015, 02:00:14 PM »
Again no need to argue it all over again. It's all in the transcript. Aside from the "evidence" you refer to. That's just opinion and faulty assumptions.

Jeremy E.

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Re: Betterment
« Reply #23 on: October 20, 2015, 02:28:24 PM »
If you think that the jcollnsnh stock series is represents the summed wisdom of all finance, fair enough.

It's a nice simple primer for beginners, and it's well written but there's a lot missing and a lot of opinion with a paucity of evidence.

It's just one smart guys opinion.

And plenty of smarter guys disagree with his opinions and have actual data to back up their's.
I never said that it's the summed wisdom of all finance, I merely used his articles to help me make a point, that VTI is diversified. I don't know too many "smarter guys"(in my opinion) that recommend diversifying into precious metals. I'd also say that the historical returns of the S&P 500 should count as "actual data", I don't know of any "smart guys" that disagree with that. So what do you need evidence of? You want evidence that Apple is an international company? Do you want evidence that companies own lots of corporate buildings and other real estate, or that REITs are in VTI? Do you want evidence that there are precious metals and commodities stocks in VTI?

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Re: Betterment
« Reply #24 on: October 20, 2015, 03:55:43 PM »
If you think that the jcollnsnh stock series is represents the summed wisdom of all finance, fair enough.

It's a nice simple primer for beginners, and it's well written but there's a lot missing and a lot of opinion with a paucity of evidence.

It's just one smart guys opinion.

And plenty of smarter guys disagree with his opinions and have actual data to back up their's.
I never said that it's the summed wisdom of all finance, I merely used his articles to help me make a point, that VTI is diversified. I don't know too many "smarter guys"(in my opinion) that recommend diversifying into precious metals. I'd also say that the historical returns of the S&P 500 should count as "actual data", I don't know of any "smart guys" that disagree with that. So what do you need evidence of? You want evidence that Apple is an international company? Do you want evidence that companies own lots of corporate buildings and other real estate, or that REITs are in VTI? Do you want evidence that there are precious metals and commodities stocks in VTI?

VTI is plenty diversified for the US investor, if you define "diversified" as holding a large number of unique companies. If you have a different definition of diversification (metals/commodities/beaniebabies), then you might not be happy with VTI. In my opinion, if you're trying to invest with under $1,000 you're probably better off keeping it in a savings account anyway. The returns won't be much different, and by the time you've reached $1,000 you can start putting it to work.

milesdividendmd

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Betterment
« Reply #25 on: October 20, 2015, 04:19:55 PM »
Jeremy,

You are arguing that owning VTI is an optimal portfolio because it is "diversified."

I am not sure what the historical returns of the S&P could possibly have to do with that. Do explain.

There is abundant evidence in the academic literature that...

1. International diversification decreases country specific risk.

2.  Exposure to price momentum increases returns.

3.  Exposure to value increases returns.

4.  Exposure to the quality factor increases returns.

5.  Exposure to the size factor increases returns

6.  A small exposure to commodities/precious medals improves portfolio efficiency/risk adjusted return. (Controversial)

7.  Exposure to REITS increase portfolio efficiency.

Investing in VTI, although it is simple, gives you exactly none of these exposures.

Therein lies the rub.

Jeremy E.

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Re: Betterment
« Reply #26 on: October 20, 2015, 06:02:25 PM »
Jeremy,

You are arguing that owning VTI is an optimal portfolio because it is "diversified."

I am not sure what the historical returns of the S&P could possibly have to do with that. Do explain.

There is abundant evidence in the academic literature that...

1. International diversification decreases country specific risk.

2.  Exposure to price momentum increases returns.

3.  Exposure to value increases returns.

4.  Exposure to the quality factor increases returns.

5.  Exposure to the size factor increases returns

6.  A small exposure to commodities/precious medals improves portfolio efficiency/risk adjusted return. (Controversial)

7.  Exposure to REITS increase portfolio efficiency.

Investing in VTI, although it is simple, gives you exactly none of these exposures.

Therein lies the rub.
VTI is equivelant to the S&P 500, they are about 85% the same and the returns are about 95% the same.

Overall I'll just say the total stock market has exposure to all of the things you mention, therefore owning VTI will give you exposure to all of them, one could even say that makes it, I don't know, diversified?

Also, price momentum is basically market timing which rarely works.

tj

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Re: Betterment
« Reply #27 on: October 20, 2015, 06:39:05 PM »
Just curious, I have listened to some financial podcasts recommending using Betterment as a good source to invest some of your portfolio....Has anyone used them and what is anyone's opinion?

Thanks,

Dale

Definitely go read all the previous threads on Betterment. I was interested in Betterment, even opened an account and started investing. After reading the threads, however, I RAN (not walked) to Vanguard. Now I get 100% of the benefits, without any of the cons, and it's cheaper to boot!

Betterment is just a middle-man between you and Vanguard. Don't waste your time.

Disagree. Betterment TLHed me over $7500 this year, yet it hasn't lost $$$. Nor have I paid a fee.

Arguing math is always silly. It's a mathematical fact that one of the options will be cheaper. Over the long-term either the TLH + extra Betterment fees will be cheaper than straight Vanguard, or it won't. All the evidence I've seen says it's not even close. Betterment loses. This evidence includes an analysis of the Vanguard ETFs used in Betterment's portfolio, going all the way back to their inception.

If you don't believe the evidence, then great! Put all your money in Betterment. Worse things can happen, it'll probably just cost you a few hundred thousand dollars over your lifetime (which for people on this forum, really isn't much). I just hope you're making your decision based on something more than their marketing material.

Here's the thing.

If I just used Vanguard, I'd most likely throw it all in Wellington or Balanced index,LifeStrategy Growth or Moderate Growth or some mixture of the aforementioned funds.

With Betterment, they are allocating my ongoing investments into the funds that are devalued at a certain time and buying low.  Theya re also using an algorithm to TLH. I could TLH on my own, but I don't have to worry about it.  Could I make more using Vanguard directly? Perhaps, but I certainly don't think that I am going to lose "hundreds of thousands of dollars" with Betterment.

Betterment works during the accumulation phase when you are contributing $$ on an ongoing basis. I don't think that Betterment makes sense during the withdrawal phase when you are no longer contributing, and I probably would transfer it to somewhere else before then. If Betterment changes it's business model, I can move my funds. That's the plus side of ETFS - you can transfer them anywhere at anytime.


I don't use Betterment for my tax advantaged accounts, and indeed I actually do use Wellington in my IRA and a homebrewed version of Wellington in my 401k.

milesdividendmd

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Betterment
« Reply #28 on: October 20, 2015, 08:10:11 PM »
Jeremy,

You are arguing that owning VTI is an optimal portfolio because it is "diversified."

I am not sure what the historical returns of the S&P could possibly have to do with that. Do explain.

There is abundant evidence in the academic literature that...

1. International diversification decreases country specific risk.

2.  Exposure to price momentum increases returns.

3.  Exposure to value increases returns.

4.  Exposure to the quality factor increases returns.

5.  Exposure to the size factor increases returns

6.  A small exposure to commodities/precious medals improves portfolio efficiency/risk adjusted return. (Controversial)

7.  Exposure to REITS increase portfolio efficiency.

Investing in VTI, although it is simple, gives you exactly none of these exposures.

Therein lies the rub.
VTI is equivelant to the S&P 500, they are about 85% the same and the returns are about 95% the same.

Overall I'll just say the total stock market has exposure to all of the things you mention, therefore owning VTI will give you exposure to all of them, one could even say that makes it, I don't know, diversified?

Also, price momentum is basically market timing which rarely works.

Wrong. Wrong. Wrong.

VTI is not the S&P (as the second clause in your sentence proves.)

VTI has zero exposure to the value factor, size factor, the momentum factor, or the quality factor. The below article may help you to understand why this is so.

http://www.etf.com/sections/index-investor-corner/22204-swedroe-factor-tilts-of-larry-portfolio.html?nopaging=1

Finally, while it is true that momentum is market timing. And it is also true market timing rarely works. It does not follow that momentum rarely works.

In fact abundant evidence suggests that Momentum works in almost all asset classes and all markets in and out of sample, before and after it was first described. And after costs.

That's just reality.

As Einstein said "make things as simple as possible. But not simpler."
« Last Edit: October 20, 2015, 09:33:04 PM by milesdividendmd »

Interest Compound

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Re: Betterment
« Reply #29 on: October 20, 2015, 09:46:55 PM »
Just curious, I have listened to some financial podcasts recommending using Betterment as a good source to invest some of your portfolio....Has anyone used them and what is anyone's opinion?

Thanks,

Dale

Definitely go read all the previous threads on Betterment. I was interested in Betterment, even opened an account and started investing. After reading the threads, however, I RAN (not walked) to Vanguard. Now I get 100% of the benefits, without any of the cons, and it's cheaper to boot!

Betterment is just a middle-man between you and Vanguard. Don't waste your time.

Disagree. Betterment TLHed me over $7500 this year, yet it hasn't lost $$$. Nor have I paid a fee.

Arguing math is always silly. It's a mathematical fact that one of the options will be cheaper. Over the long-term either the TLH + extra Betterment fees will be cheaper than straight Vanguard, or it won't. All the evidence I've seen says it's not even close. Betterment loses. This evidence includes an analysis of the Vanguard ETFs used in Betterment's portfolio, going all the way back to their inception.

If you don't believe the evidence, then great! Put all your money in Betterment. Worse things can happen, it'll probably just cost you a few hundred thousand dollars over your lifetime (which for people on this forum, really isn't much). I just hope you're making your decision based on something more than their marketing material.

Here's the thing.

If I just used Vanguard, I'd most likely throw it all in Wellington or Balanced index,LifeStrategy Growth or Moderate Growth or some mixture of the aforementioned funds.

With Betterment, they are allocating my ongoing investments into the funds that are devalued at a certain time and buying low.  Theya re also using an algorithm to TLH. I could TLH on my own, but I don't have to worry about it.  Could I make more using Vanguard directly? Perhaps, but I certainly don't think that I am going to lose "hundreds of thousands of dollars" with Betterment.

Betterment works during the accumulation phase when you are contributing $$ on an ongoing basis. I don't think that Betterment makes sense during the withdrawal phase when you are no longer contributing, and I probably would transfer it to somewhere else before then. If Betterment changes it's business model, I can move my funds. That's the plus side of ETFS - you can transfer them anywhere at anytime.


I don't use Betterment for my tax advantaged accounts, and indeed I actually do use Wellington in my IRA and a homebrewed version of Wellington in my 401k.

Is it your belief that if you deposited money into a LifeStrategy Growth fund once a month, the fund wouldn't be buying low during a stock dip? I don't see any difference here.

Look at any expense ratio calculator to see how you can get to hundreds of thousands over a standard 30 year retirement (just focusing on the withdrawal phase):



Or a 50 year early retirement:



While TLH sounds cool (I should know, I fell for the trap myself!) paying a higher ER to get it is mathematically a losers game. You can move your ETFs out of Betterment once you cross the threshold, but then you have to manually manage the 10-20 fund portfolio they put you in for the rest of your life. The type of person who seeks out Betterment/LifeStrategy, probably isn't also the type of person who would be happy with a 10-20 ETF manual portfolio.

Think about it this way tj, what made you interested in Betterment in the first place? Was it an ad? A review from a blogger who conveniently had their referral link at the bottom? How do you think they can afford all those ads (hint, as a Betterment customer, you're paying for them). If you're really into what Betterment has to offer, why not go with Wisebanyan? They offer all the benefits that seem to be tying you to Betterment (TLH, ETFs...etc), but without the extra fees. In fact, Wisebanyan's fees are even lower than Vanguard Lifestrategy:



https://wisebanyan.com/faq/investment-overview/fund-fees

milesdividendmd

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Betterment
« Reply #30 on: October 20, 2015, 09:57:45 PM »
Haha.

9 percent return.

Identical returns from 2 very different portfolios.

No TLH savings accumulated during the accumulation phase compounded and reflected in the starting amount during withdrawal. 

Garbage assumptions fed into a calculator lead to garbage results out of a calculator.

Same stuff different day.
« Last Edit: October 20, 2015, 10:09:58 PM by milesdividendmd »

milesdividendmd

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Re: Betterment
« Reply #31 on: October 20, 2015, 10:25:44 PM »
It doesn't appear that wise banyan even offers TLH.

https://investorjunkie.com/35387/wisebanyan-review/

bryan

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Re: Betterment
« Reply #32 on: October 21, 2015, 12:01:51 AM »
@Interest Compound, I have to agree with @miles that the comparison you shared isn't too convincing.

> TLH sounds cool (I should know, I fell for the trap myself!) paying a higher ER to get it is mathematically a losers game.

Are you referring to just considering how much TLH can save you on income taxes? Like $840 max? So anything over ~$550k (close to breakeven) in Betterment is nonsense? Not to mention the better case if you have some other capital gains elsewhere that they could be offsetting?

I saw this in another thread as well:
> your ability to tax loss harvest is usually limited to the first 1-3 years after purchase.

Which again I don't buy since Betterment is marketed for accumulators, constantly buying, buying, buying. Would actually be pretty cool to use Betterment and get maybe 3x the capital losses as you would manually and be able to carry those forward into FI.. Let me know if I missed any reasons?

Plus, if you are not already FI or late in your accumulation phase and you have a high savings rate (not sure exactly what that would be.. 70%, 80%?), CAGR doesn't matter much anyway (especially not .15%).

Not to say I recommend Betterment.. see my earlier post.
« Last Edit: October 21, 2015, 12:10:15 AM by bryan »

Interest Compound

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Re: Betterment
« Reply #33 on: October 21, 2015, 07:18:26 AM »
@Interest Compound, I have to agree with @miles that the comparison you shared isn't too convincing.

> TLH sounds cool (I should know, I fell for the trap myself!) paying a higher ER to get it is mathematically a losers game.

Are you referring to just considering how much TLH can save you on income taxes? Like $840 max? So anything over ~$550k (close to breakeven) in Betterment is nonsense? Not to mention the better case if you have some other capital gains elsewhere that they could be offsetting?

I saw this in another thread as well:
> your ability to tax loss harvest is usually limited to the first 1-3 years after purchase.

Which again I don't buy since Betterment is marketed for accumulators, constantly buying, buying, buying. Would actually be pretty cool to use Betterment and get maybe 3x the capital losses as you would manually and be able to carry those forward into FI.. Let me know if I missed any reasons?

Plus, if you are not already FI or late in your accumulation phase and you have a high savings rate (not sure exactly what that would be.. 70%, 80%?), CAGR doesn't matter much anyway (especially not .15%).

Not to say I recommend Betterment.. see my earlier post.

If you want TLH, go with WiseBanyan, they offer it for free. My main point isn't that TLH is bad, it's just not worth paying a percentage fee on your portfolio for. Simple math really.

https://wisebanyan.com/faq/marketplace/how-tax-loss-harvesting-works

Anyone who uses Betterment during the accumulation phase, either needs to use them for the distribution phase as well, or learn to manually manage a 10-20 ETF portfolio. Along with the cost-basis of what will probably be hundreds/thousands of transactions by then. Something tells me the type of person who is drawn to Betterment isn't interested in keeping track of all that.

Yes, I'm referring to both the ~$840 max, and the fact that any individual tax lot has historically only had any TLH opportunities within 1-3 years of purchase. While you're buying buying buying with new money, that doesn't change the fact that all your old money is now experiencing a comparative loss. Don't take my word for it, do the math as suggested in the other thread. You'll come to the same conclusion. But honestly, why bother doing the math at all...when a competitor is offering the same service for free?

I agree, the 0.15% doesn't matter much. Probably just a few hundred thousand dollars over your lifetime. I'm not being facetious, it's really not that much in the grand scheme of things. We're all future millionaires debating over relative peanuts :)

tj

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Re: Betterment
« Reply #34 on: October 21, 2015, 07:27:44 AM »
Just curious, I have listened to some financial podcasts recommending using Betterment as a good source to invest some of your portfolio....Has anyone used them and what is anyone's opinion?

Thanks,

Dale

Definitely go read all the previous threads on Betterment. I was interested in Betterment, even opened an account and started investing. After reading the threads, however, I RAN (not walked) to Vanguard. Now I get 100% of the benefits, without any of the cons, and it's cheaper to boot!

Betterment is just a middle-man between you and Vanguard. Don't waste your time.

Disagree. Betterment TLHed me over $7500 this year, yet it hasn't lost $$$. Nor have I paid a fee.

Arguing math is always silly. It's a mathematical fact that one of the options will be cheaper. Over the long-term either the TLH + extra Betterment fees will be cheaper than straight Vanguard, or it won't. All the evidence I've seen says it's not even close. Betterment loses. This evidence includes an analysis of the Vanguard ETFs used in Betterment's portfolio, going all the way back to their inception.

If you don't believe the evidence, then great! Put all your money in Betterment. Worse things can happen, it'll probably just cost you a few hundred thousand dollars over your lifetime (which for people on this forum, really isn't much). I just hope you're making your decision based on something more than their marketing material.

Here's the thing.

If I just used Vanguard, I'd most likely throw it all in Wellington or Balanced index,LifeStrategy Growth or Moderate Growth or some mixture of the aforementioned funds.

With Betterment, they are allocating my ongoing investments into the funds that are devalued at a certain time and buying low.  Theya re also using an algorithm to TLH. I could TLH on my own, but I don't have to worry about it.  Could I make more using Vanguard directly? Perhaps, but I certainly don't think that I am going to lose "hundreds of thousands of dollars" with Betterment.

Betterment works during the accumulation phase when you are contributing $$ on an ongoing basis. I don't think that Betterment makes sense during the withdrawal phase when you are no longer contributing, and I probably would transfer it to somewhere else before then. If Betterment changes it's business model, I can move my funds. That's the plus side of ETFS - you can transfer them anywhere at anytime.


I don't use Betterment for my tax advantaged accounts, and indeed I actually do use Wellington in my IRA and a homebrewed version of Wellington in my 401k.

Is it your belief that if you deposited money into a LifeStrategy Growth fund once a month, the fund wouldn't be buying low during a stock dip? I don't see any difference here.

Look at any expense ratio calculator to see how you can get to hundreds of thousands over a standard 30 year retirement (just focusing on the withdrawal phase):



Or a 50 year early retirement:



While TLH sounds cool (I should know, I fell for the trap myself!) paying a higher ER to get it is mathematically a losers game. You can move your ETFs out of Betterment once you cross the threshold, but then you have to manually manage the 10-20 fund portfolio they put you in for the rest of your life. The type of person who seeks out Betterment/LifeStrategy, probably isn't also the type of person who would be happy with a 10-20 ETF manual portfolio.

Think about it this way tj, what made you interested in Betterment in the first place? Was it an ad? A review from a blogger who conveniently had their referral link at the bottom? How do you think they can afford all those ads (hint, as a Betterment customer, you're paying for them). If you're really into what Betterment has to offer, why not go with Wisebanyan? They offer all the benefits that seem to be tying you to Betterment (TLH, ETFs...etc), but without the extra fees. In fact, Wisebanyan's fees are even lower than Vanguard Lifestrategy:



https://wisebanyan.com/faq/investment-overview/fund-fees

You are assuming that the Betterment and LifeStrategy allocations will return the same before fees. That isn't necessarily true. I also disagree with your assessment that LifeStrategy is buying individual asset classes low. LifeStrategy has a static allocation and always buys in that allocation. Betterment is buying the asset class that is low at the time of your purchase.

Aphalite

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Re: Betterment
« Reply #35 on: October 21, 2015, 07:41:42 AM »
Jeremy,

You are arguing that owning VTI is an optimal portfolio because it is "diversified."

I am not sure what the historical returns of the S&P could possibly have to do with that. Do explain.

There is abundant evidence in the academic literature that...

1. International diversification decreases country specific risk.

2.  Exposure to price momentum increases returns.

3.  Exposure to value increases returns.

4.  Exposure to the quality factor increases returns.

5.  Exposure to the size factor increases returns

6.  A small exposure to commodities/precious medals improves portfolio efficiency/risk adjusted return. (Controversial)

7.  Exposure to REITS increase portfolio efficiency.

Investing in VTI, although it is simple, gives you exactly none of these exposures.

Therein lies the rub.

Miles, if you believe all of this, why do you index at all? If you try and accomplish all of your points above using individual stocks within your portfolio, you would be plenty diversified without holding index funds. The attraction of indexing is that an investor can be a know nothing and just let the market dictate the terms. If you're going to shuffle all sorts of indexes around, what's the point? I don't know how Betterment carries out their allocation strategy - if they stick to their starting allocation, it's probably fine, but if they continuously update their allocation based on historical data (in the name of "process improvement"), that's nothing other than chasing returns, no?

Didn't Bogle warn about this type of "chasing returns" amongst mutual funds? From what I can tell (could be completely off base here, but this is just a discussion, please don't take it as a personal attack) you're doing an inverted version of that - taking what's happened in history and doing what you believe to be "buying low". You can scream "reversion to the mean" all you want but the mean is just another historical benchmark, and we all know that history isn't indicative of the future, right?

Interest Compound

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Re: Betterment
« Reply #36 on: October 21, 2015, 08:02:05 AM »
You are assuming that the Betterment and LifeStrategy allocations will return the same before fees. That isn't necessarily true. I also disagree with your assessment that LifeStrategy is buying individual asset classes low. LifeStrategy has a static allocation and always buys in that allocation. Betterment is buying the asset class that is low at the time of your purchase.

Unless you specifically want a Value oriented portfolio (not recommended), the prospective Betterment customer doesn't see any difference between the LifeStrategy allocation, and the Betterment allocation. Assuming a neutral stance on that, why pay more for an identical-to-you portfolio?

Can you substantiate the mathematical difference between buying low when contributing to an 80/20 fund, and buying low when contributing to an 80/20 ETF portfolio? Do you think you'll see more returns with ETFs? I think you might be misunderstanding how this works.

milesdividendmd

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Re: Betterment
« Reply #37 on: October 21, 2015, 10:00:42 AM »

Jeremy,

You are arguing that owning VTI is an optimal portfolio because it is "diversified."

I am not sure what the historical returns of the S&P could possibly have to do with that. Do explain.

There is abundant evidence in the academic literature that...

1. International diversification decreases country specific risk.

2.  Exposure to price momentum increases returns.

3.  Exposure to value increases returns.

4.  Exposure to the quality factor increases returns.

5.  Exposure to the size factor increases returns

6.  A small exposure to commodities/precious medals improves portfolio efficiency/risk adjusted return. (Controversial)

7.  Exposure to REITS increase portfolio efficiency.

Investing in VTI, although it is simple, gives you exactly none of these exposures.

Therein lies the rub.

Miles, if you believe all of this, why do you index at all? If you try and accomplish all of your points above using individual stocks within your portfolio, you would be plenty diversified without holding index funds. The attraction of indexing is that an investor can be a know nothing and just let the market dictate the terms. If you're going to shuffle all sorts of indexes around, what's the point? I don't know how Betterment carries out their allocation strategy - if they stick to their starting allocation, it's probably fine, but if they continuously update their allocation based on historical data (in the name of "process improvement"), that's nothing other than chasing returns, no?

Didn't Bogle warn about this type of "chasing returns" amongst mutual funds? From what I can tell (could be completely off base here, but this is just a discussion, please don't take it as a personal attack) you're doing an inverted version of that - taking what's happened in history and doing what you believe to be "buying low". You can scream "reversion to the mean" all you want but the mean is just another historical benchmark, and we all know that history isn't indicative of the future, right?

Before I answer your question about what I believe, I think it would be useful for you to share which of the above statements you don't believe.

Jeremy E.

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Re: Betterment
« Reply #38 on: October 21, 2015, 10:20:15 AM »
Jeremy,

You are arguing that owning VTI is an optimal portfolio because it is "diversified."

I am not sure what the historical returns of the S&P could possibly have to do with that. Do explain.

There is abundant evidence in the academic literature that...

1. International diversification decreases country specific risk.

2.  Exposure to price momentum increases returns.

3.  Exposure to value increases returns.

4.  Exposure to the quality factor increases returns.

5.  Exposure to the size factor increases returns

6.  A small exposure to commodities/precious medals improves portfolio efficiency/risk adjusted return. (Controversial)

7.  Exposure to REITS increase portfolio efficiency.

Investing in VTI, although it is simple, gives you exactly none of these exposures.

Therein lies the rub.
VTI is equivelant to the S&P 500, they are about 85% the same and the returns are about 95% the same.

Overall I'll just say the total stock market has exposure to all of the things you mention, therefore owning VTI will give you exposure to all of them, one could even say that makes it, I don't know, diversified?

Also, price momentum is basically market timing which rarely works.

Wrong. Wrong. Wrong.

VTI is not the S&P (as the second clause in your sentence proves.)

VTI has zero exposure to the value factor, size factor, the momentum factor, or the quality factor. The below article may help you to understand why this is so.

http://www.etf.com/sections/index-investor-corner/22204-swedroe-factor-tilts-of-larry-portfolio.html?nopaging=1

Finally, while it is true that momentum is market timing. And it is also true market timing rarely works. It does not follow that momentum rarely works.

In fact abundant evidence suggests that Momentum works in almost all asset classes and all markets in and out of sample, before and after it was first described. And after costs.

That's just reality.

As Einstein said "make things as simple as possible. But not simpler."
VTI is basically the S&P 500, and may be used to find historical data, although it can be assumed that VTI would of done slightly better than the S&P 500 historically.
any stock in any value fund, size specific fund, etc. that is betterment uses is also in VTI

Aphalite

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Re: Betterment
« Reply #39 on: October 21, 2015, 11:28:43 AM »
Before I answer your question about what I believe, I think it would be useful for you to share which of the above statements you don't believe.

Sure thing - let me lead off by saying that I only buy index funds if forced to - in 401Ks, etc. Otherwise I'm a dirty stock picker - growth at a reasonable price, Philip Fisher and all that jazz - mostly consumer staples, healthcare, and energy sectors - lately I have picked up some Disney and Home Depot which falls under consumer discretionary. That said, to your 7 points

1. International diversification decreases country specific risk.
I disagree here, but perhaps owing more to definition of risk. As others have mentioned already, 33%+ of the SP500 and therefore VTI (maybe a smaller percentage? 30%?) revenues already come from overseas, so if one is defining risk as the probability that foreign economies will grow at a greater rate than the US, I don't think there's much risk at all in investing in VTI, as in doing so, you are capturing the growth of foreign economies anyways, as US companies continue to grow sales. Are there foreign companies that are fantastic? Sure! I am long Nestle and hope to accumulate so much in my lifetime that it will be one of my biggest holdings by the time I'm dead. There are some others such as Unilever, Shell, etc. that would boost risk adjusted returns wonderfully. But these companies obtain much of their revenue from the US as well. Nestle's 2014 report states that 23.5b of the 91.6b, or 26%, in total revenues were generated in the US alone. The one risk I do see in investing only in one country's capital markets is the risk of currency fluctuations. But if you wanted to hedge against that, you would have to buy your foreign companies in foreign currency, leaving it to compound by itself. Since most investors do not undertake such actions, I think there's not much to this statement.

2.  Exposure to price momentum increases returns.
I think there's been enough coverage in the dual momentum thread on this - momentum increases returns until it doesn't, you have to have a indicator to know when to stop/get out. Over the long term, you'll probably come out ahead following a momentum strategy if you have a reliable indicator. Whether you can find such an indicator that worked in the past and will also be reliable in the future is debatable. Moving on.

3.  Exposure to value increases returns.
100% agree.

4.  Exposure to the quality factor increases returns.
100% agree. But here, how do you define quality? What index do you/Betterment use that screens based on quality? Is it operating margin? Return on invested capital? The percentage of net income that's true free cash flow? EPS growth? Brand awareness? I have trouble with this all the time as an individual security investor - this will be a topic I'm learning on until the very end.

5.  Exposure to the size factor increases returns
I assume you're talking about exposure to smaller firms here. I agree, but with a caveat. I think it takes an inordinate amount of time to know which small firms will be able to succeed and grab and hold market share in the future. The smart thing to do is to buy a basket and wait and see. However, it does worry me a little that the majority of the returns by small cap companies occurred in five giant spurts. Below is copied from http://theconservativeincomeinvestor.com/2014/10/06/small-cap-index-funds-are-good-investments-but-with-a-caveat/
"There were five years that were highly, highly important for you to be invested in small-cap stocks if you sought to benefit from significant outperformance. You had to be invested from October 1990-October 1991, when small-cap stocks delivered returns of 51%. You had to be invested October 2002-October 2003, when small-cap stocks returned a little over 60%. You had to be invested October 1966-October 1967, when small-caps delivered returns of 75%. You had to be there March 2009-March 2010, when returns were over 90%. And then there is April 1942 through April 1943, when small-cap returned just shy of 150%. And then the big cahuna: From June 1932 through June 1933, when the small-caps returned 315%.
The years 1990, 2002, 1966, 2009, 1942, and 1933 had a tremendously outsized impact on the performance of small-cap companies. If you missed those six years and were around for the other 87, you saw your 12% annual returns become less than 7%.
"

6.  A small exposure to commodities/precious medals improves portfolio efficiency/risk adjusted return. (Controversial)
I begrudgingly agree. A result of rebalancing bonus - this is more of a play on investor behavior than anything else. If you are meticulous and disciplined about rebalancing, you get a boost because of buy low/sell high that has historically worked out because of the low correlation between these asset "investments" and stocks

7.  Exposure to REITS increase portfolio efficiency.
Disagree - REITS act too much like stocks, and efficiency wise unless its in a tax advantaged account you're getting hit by the payouts

I pulled up an example Betterment portfolio, and it has massive amounts of overlap in domestic equity selections (VTI, VTV, VBR) - after all of the bells and whistles, you're approximating a normal domestic equity/international equity/total bond allocation anyways. Why make it complicated? If you insist that holding just total market is not the best way to behave as an investor, then why index?

milesdividendmd

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Re: Betterment
« Reply #40 on: October 21, 2015, 01:50:54 PM »

Before I answer your question about what I believe, I think it would be useful for you to share which of the above statements you don't believe.

Sure thing - let me lead off by saying that I only buy index funds if forced to - in 401Ks, etc. Otherwise I'm a dirty stock picker - growth at a reasonable price, Philip Fisher and all that jazz - mostly consumer staples, healthcare, and energy sectors - lately I have picked up some Disney and Home Depot which falls under consumer discretionary. That said, to your 7 points

1. International diversification decreases country specific risk.
I disagree here, but perhaps owing more to definition of risk. As others have mentioned already, 33%+ of the SP500 and therefore VTI (maybe a smaller percentage? 30%?) revenues already come from overseas, so if one is defining risk as the probability that foreign economies will grow at a greater rate than the US, I don't think there's much risk at all in investing in VTI, as in doing so, you are capturing the growth of foreign economies anyways, as US companies continue to grow sales. Are there foreign companies that are fantastic? Sure! I am long Nestle and hope to accumulate so much in my lifetime that it will be one of my biggest holdings by the time I'm dead. There are some others such as Unilever, Shell, etc. that would boost risk adjusted returns wonderfully. But these companies obtain much of their revenue from the US as well. Nestle's 2014 report states that 23.5b of the 91.6b, or 26%, in total revenues were generated in the US alone. The one risk I do see in investing only in one country's capital markets is the risk of currency fluctuations. But if you wanted to hedge against that, you would have to buy your foreign companies in foreign currency, leaving it to compound by itself. Since most investors do not undertake such actions, I think there's not much to this statement.

2.  Exposure to price momentum increases returns.
I think there's been enough coverage in the dual momentum thread on this - momentum increases returns until it doesn't, you have to have a indicator to know when to stop/get out. Over the long term, you'll probably come out ahead following a momentum strategy if you have a reliable indicator. Whether you can find such an indicator that worked in the past and will also be reliable in the future is debatable. Moving on.

3.  Exposure to value increases returns.
100% agree.

4.  Exposure to the quality factor increases returns.
100% agree. But here, how do you define quality? What index do you/Betterment use that screens based on quality? Is it operating margin? Return on invested capital? The percentage of net income that's true free cash flow? EPS growth? Brand awareness? I have trouble with this all the time as an individual security investor - this will be a topic I'm learning on until the very end.

5.  Exposure to the size factor increases returns
I assume you're talking about exposure to smaller firms here. I agree, but with a caveat. I think it takes an inordinate amount of time to know which small firms will be able to succeed and grab and hold market share in the future. The smart thing to do is to buy a basket and wait and see. However, it does worry me a little that the majority of the returns by small cap companies occurred in five giant spurts. Below is copied from http://theconservativeincomeinvestor.com/2014/10/06/small-cap-index-funds-are-good-investments-but-with-a-caveat/
"There were five years that were highly, highly important for you to be invested in small-cap stocks if you sought to benefit from significant outperformance. You had to be invested from October 1990-October 1991, when small-cap stocks delivered returns of 51%. You had to be invested October 2002-October 2003, when small-cap stocks returned a little over 60%. You had to be invested October 1966-October 1967, when small-caps delivered returns of 75%. You had to be there March 2009-March 2010, when returns were over 90%. And then there is April 1942 through April 1943, when small-cap returned just shy of 150%. And then the big cahuna: From June 1932 through June 1933, when the small-caps returned 315%.
The years 1990, 2002, 1966, 2009, 1942, and 1933 had a tremendously outsized impact on the performance of small-cap companies. If you missed those six years and were around for the other 87, you saw your 12% annual returns become less than 7%.
"

6.  A small exposure to commodities/precious medals improves portfolio efficiency/risk adjusted return. (Controversial)
I begrudgingly agree. A result of rebalancing bonus - this is more of a play on investor behavior than anything else. If you are meticulous and disciplined about rebalancing, you get a boost because of buy low/sell high that has historically worked out because of the low correlation between these asset "investments" and stocks

7.  Exposure to REITS increase portfolio efficiency.
Disagree - REITS act too much like stocks, and efficiency wise unless its in a tax advantaged account you're getting hit by the payouts

I pulled up an example Betterment portfolio, and it has massive amounts of overlap in domestic equity selections (VTI, VTV, VBR) - after all of the bells and whistles, you're approximating a normal domestic equity/international equity/total bond allocation anyways. Why make it complicated? If you insist that holding just total market is not the best way to behave as an investor, then why index?

1.  On international diversification: I define the risk of home field bias as the risk of underperformance relative to  global equities. The only way to come out ahead is if the U.S. outperforms the rest of the world going forward and after fees. But you are exposing yourself to the idiosyncratic risk of the massive underperformance of your home field country. Some times stock markets do go to zero. The passive bet is is to weight geographically by market cap to decrease idiosyncratic risk.

I could go on about why I think a U.S. home field bias is problematic right now, and why US multinationals do not adequately diversify investors geographically . But that's a different subject.

2.  Momentum increases returns period, full stop. It also increases drawdown.  even considering drawdowns, however, it does increase returns, no caveats required. Just apply the academic definition to any market and it increases returns.

3.  Agreed. Betterment has value exposure, VTI doesn't.

4.  Betterment has exposure to size and value only. Not momentum or quality. VTI has exposure to no factors other than beta.

5. See 4,  small size increases returns, betterment has exposure to small size.

6.  Agreed. No betterment exposure.

7.  REITS have an imperfect correlation to equities and a positive expected return. Including them in a portfolio increases efficiency. Betterment has no exposure.

So betterment has international exposure and a small and value tilt. VTI has none of those.  In addition betterment taxable accounts allocate to municipal bonds, which are more tax efficient than say a target date or target strategy fund which allocated to total bond.

It's a pretty standard modern portfolio theory allocation portfolio. VTI is not.

It's still indexing, it just includes a small value tilt and international exposure.

The reason to make it "complicated" is because it increases your expected returns and risk adjusted returns. None of this is exotic or complicated. In fact with betterment it's exactly as simple as putting all of your money in VTI.

and all of that is before considering the effects of TLH.



bryan

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Re: Betterment
« Reply #41 on: October 21, 2015, 01:52:16 PM »
Anyone who uses Betterment during the accumulation phase, either needs to use them for the distribution phase as well, or learn to manually manage a 10-20 ETF portfolio. Along with the cost-basis of what will probably be hundreds/thousands of transactions by then. Something tells me the type of person who is drawn to Betterment isn't interested in keeping track of all that.

I am interested in Betterment but didn't go with them since they don't consider extrenal accounts like e.g. futureadvisor. Also they lack tax gain harvesting or any portfolio other than what they give you.

I already do 10-20 ETFs. Balance only by buying new shares or when I TLH. I haven't had to do an annual rebalance after taking those other rebalances into account. I would be fine with taking over the assets from Betterment with unrealized gains. TurboTax should handle everything just fine.

Betterment (with fees) is a no go for anything over $500k as we agree. Unless they incorporate better post-FI features like glidepath or what I already mentioned.

I agree, the 0.15% doesn't matter much. Probably just a few hundred thousand dollars over your lifetime. I'm not being facetious, it's really not that much in the grand scheme of things. We're all future millionaires debating over relative peanuts :)

The .15% wouldn't be there for your lifetime, just as long as you are paying for it (say the 7 years when your networth is the lowest, or longer if they add more features for post-FI). The CAGR doesn't matter when your savings rate is like 80%. Just compare time to FIRE starting from zero with a lazy portfolio versus all TIPS (where the moment you FI you definitely are in the aforementioned lazy portfolio). Not a big difference at all. Here's not a perfect, but gets the point across comparison:
- golden butterfly, ~6.2% real CAGR: https://www.portfoliovisualizer.com/monte-carlo-simulation?s=y&yearlyWithdrawal=80000&allocation1_1=20&fullHistory=true&allocation4_1=20&allocation5_1=20&allocation2_1=20&allocation3_1=20&circularBootstrap=true&yearlyPercentage=4.0&simulationModel=2&volatility=12.0&distribution=1&endYear=2014&years=7&currentAge=70&bootstrapMaxYears=20&asset1=TotalStockMarket&asset2=IntlStockMarket&asset3=TotalBond&inflationAdjusted=true&asset4=Commodities&annualOperation=1&asset5=REIT&inflationVolatility=3.13&lifeExpectancyModel=0&bootstrapMinYears=1&inflationMean=4.26&meanReturn=7.0&startYear=1972&bootstrapModel=1&inflationModel=1&initialAmount=1
- 100% TIPS, ~2.7% real CAGR: https://www.portfoliovisualizer.com/monte-carlo-simulation?s=y&yearlyWithdrawal=80000&allocation1_1=100&fullHistory=true&allocation4_1=0&allocation5_1=0&allocation2_1=0&allocation3_1=0&circularBootstrap=true&yearlyPercentage=4.0&simulationModel=2&volatility=12.0&distribution=1&endYear=2014&years=7&currentAge=70&bootstrapMaxYears=20&asset1=TIPS&asset2=TIPS&asset3=TotalBond&inflationAdjusted=true&asset4=Commodities&annualOperation=1&asset5=REIT&inflationVolatility=3.13&lifeExpectancyModel=0&bootstrapMinYears=1&inflationMean=4.26&meanReturn=7.0&startYear=1972&bootstrapModel=1&inflationModel=1&initialAmount=1

which give you initial conditions after 7 years of: ~$906014, ~$809,661, respectively. So it means working for ~1 more year if you don't want to mess with investing and just stick everything into TIPS before FI. Or you could roll the dice and put everything in TSM and have on median $912,752 (more variance though). Or you could let Betterment (or another robo with TLH) do everything for you.

And if you really wanted to see the lack of difference of .15% over 7 years.. I could come up with a portfolio with golden butterfly CAGR - .15% fees (6.2% - .15%). I suspect it means working for like one or two extra paychecks?

edit: done:
- more bonds golden butterfly, ~6.05% real CAGR https://www.portfoliovisualizer.com/monte-carlo-simulation?s=y&yearlyWithdrawal=80000&allocation1_1=15&fullHistory=true&allocation4_1=20&allocation5_1=20&allocation2_1=20&allocation3_1=25&circularBootstrap=true&yearlyPercentage=4.0&simulationModel=2&volatility=12.0&distribution=1&endYear=2014&years=7&currentAge=70&bootstrapMaxYears=20&asset1=TotalStockMarket&asset2=IntlStockMarket&asset3=TotalBond&inflationAdjusted=true&asset4=Commodities&annualOperation=1&asset5=REIT&inflationVolatility=3.13&lifeExpectancyModel=0&bootstrapMinYears=1&inflationMean=4.26&meanReturn=7.0&startYear=1972&bootstrapModel=1&inflationModel=1&initialAmount=1

it is a difference of about $9k, which in this hypothetical would be about 2-3 paychecks.
« Last Edit: October 21, 2015, 02:31:28 PM by bryan »

Aphalite

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Re: Betterment
« Reply #42 on: October 21, 2015, 02:21:44 PM »

3.  Agreed. Betterment has value exposure, VTI doesn't.

4.  Betterment has exposure to size and value only. Not momentum or quality. VTI has exposure to no factors other than beta.


I'm curious why you believe this. Are you saying that Betterment has a tilt towards value? It seems it allocates about 25% US value equity and then 20% total US equity, in effect giving it a tilt of 35 to 10 value/growth for domestic equities. VTI has a ton of "value" exposure, one could say that it's 50/50 value/growth - otherwise the valuation of the total market would be insane. It seems conflicting to me that you believe momentum boosts gains, but then also hold "value" to be better than "growth". "Growth" securities tend to rely on momentum more so to generate total returns than "value" securities

Betterment also has about 70% of its equity allocation to large cap (between VTI ~13% (18 x 70%), large cap value ~18%, and then developed markets ETF ~38% (45 x 85%)), which isn't so different from the 70% or so to large cap that VTI dedicates (41% giant and 29% large).

milesdividendmd

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Re: Betterment
« Reply #43 on: October 21, 2015, 02:33:55 PM »


3.  Agreed. Betterment has value exposure, VTI doesn't.

4.  Betterment has exposure to size and value only. Not momentum or quality. VTI has exposure to no factors other than beta.


I'm curious why you believe this. Are you saying that Betterment has a tilt towards value? It seems it allocates about 25% US value equity and then 20% total US equity, in effect giving it a tilt of 35 to 10 value/growth for domestic equities. VTI has a ton of "value" exposure, one could say that it's 50/50 value/growth - otherwise the valuation of the total market would be insane. It seems conflicting to me that you believe momentum boosts gains, but then also hold "value" to be better than "growth". "Growth" securities tend to rely on momentum more so to generate total returns than "value" securities

Betterment also has about 70% of its equity allocation to large cap (between VTI ~13% (18 x 70%), large cap value ~18%, and then developed markets ETF ~38% (45 x 85%)), which isn't so different from the 70% or so to large cap that VTI dedicates (41% giant and 29% large).

The following quote is taken from the Larry Swedroe article linked in post 29. I believe it explicitly answers your question.

"A total stock market (TSM) fund has, by definition, an exposure to beta of 1. However, while a TSM fund holds small stocks, it has no exposure at all to the size factor. This seeming contradiction confuses many investors. The reason for the confusion is that factors are long/short portfolios. The size factor is the return of small stocks minus the return of large stocks. In other words, small stocks provide a positive exposure to the size effect, and large stocks provide a negative exposure to it.

Thus, while the small stocks in TSM provide positive exposure to the size factor, the large stocks in TSM provide an exactly offsetting amount of negative exposure. That puts the net exposure to the size factor at 0.

The same is true for value stocks. The value factor is the return of value stocks minus the return of growth stocks. Value stocks provide a positive exposure to the value effect and growth stocks a negative exposure. While the value stocks within TSM provide positive exposure to the value factor, the growth stocks in TSM provide an exactly offsetting amount of negative exposure. That puts the net exposure to the value factor at 0."


tj

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Re: Betterment
« Reply #44 on: October 21, 2015, 06:23:31 PM »
You are assuming that the Betterment and LifeStrategy allocations will return the same before fees. That isn't necessarily true. I also disagree with your assessment that LifeStrategy is buying individual asset classes low. LifeStrategy has a static allocation and always buys in that allocation. Betterment is buying the asset class that is low at the time of your purchase.

Unless you specifically want a Value oriented portfolio (not recommended), the prospective Betterment customer doesn't see any difference between the LifeStrategy allocation, and the Betterment allocation. Assuming a neutral stance on that, why pay more for an identical-to-you portfolio?

Can you substantiate the mathematical difference between buying low when contributing to an 80/20 fund, and buying low when contributing to an 80/20 ETF portfolio? Do you think you'll see more returns with ETFs? I think you might be misunderstanding how this works.

I don't see a problem with a value-oriented portfolio. Several successful funds have been value tilted.

It's impossible to know the mathematical difference of buying individual ETFS low vs. investing in a fund, the fact is that the a robo advise is mathmetically contributing your new funds to bring your portfolio back into allocation. The fund just stays the same (if you use an all in one fund). I assume the all-in-one fund is smartly run by the managers to minimize gain distributions and such.

thanks
TJ

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Re: Betterment
« Reply #45 on: October 21, 2015, 09:51:11 PM »
Anyone who uses Betterment during the accumulation phase, either needs to use them for the distribution phase as well, or learn to manually manage a 10-20 ETF portfolio. Along with the cost-basis of what will probably be hundreds/thousands of transactions by then. Something tells me the type of person who is drawn to Betterment isn't interested in keeping track of all that.

I am interested in Betterment but didn't go with them since they don't consider extrenal accounts like e.g. futureadvisor. Also they lack tax gain harvesting or any portfolio other than what they give you.

I already do 10-20 ETFs. Balance only by buying new shares or when I TLH. I haven't had to do an annual rebalance after taking those other rebalances into account. I would be fine with taking over the assets from Betterment with unrealized gains. TurboTax should handle everything just fine.

Betterment (with fees) is a no go for anything over $500k as we agree. Unless they incorporate better post-FI features like glidepath or what I already mentioned.

I agree, the 0.15% doesn't matter much. Probably just a few hundred thousand dollars over your lifetime. I'm not being facetious, it's really not that much in the grand scheme of things. We're all future millionaires debating over relative peanuts :)

The .15% wouldn't be there for your lifetime, just as long as you are paying for it (say the 7 years when your networth is the lowest, or longer if they add more features for post-FI). The CAGR doesn't matter when your savings rate is like 80%. Just compare time to FIRE starting from zero with a lazy portfolio versus all TIPS (where the moment you FI you definitely are in the aforementioned lazy portfolio). Not a big difference at all. Here's not a perfect, but gets the point across comparison:
- golden butterfly, ~6.2% real CAGR: https://www.portfoliovisualizer.com/monte-carlo-simulation?s=y&yearlyWithdrawal=80000&allocation1_1=20&fullHistory=true&allocation4_1=20&allocation5_1=20&allocation2_1=20&allocation3_1=20&circularBootstrap=true&yearlyPercentage=4.0&simulationModel=2&volatility=12.0&distribution=1&endYear=2014&years=7&currentAge=70&bootstrapMaxYears=20&asset1=TotalStockMarket&asset2=IntlStockMarket&asset3=TotalBond&inflationAdjusted=true&asset4=Commodities&annualOperation=1&asset5=REIT&inflationVolatility=3.13&lifeExpectancyModel=0&bootstrapMinYears=1&inflationMean=4.26&meanReturn=7.0&startYear=1972&bootstrapModel=1&inflationModel=1&initialAmount=1
- 100% TIPS, ~2.7% real CAGR: https://www.portfoliovisualizer.com/monte-carlo-simulation?s=y&yearlyWithdrawal=80000&allocation1_1=100&fullHistory=true&allocation4_1=0&allocation5_1=0&allocation2_1=0&allocation3_1=0&circularBootstrap=true&yearlyPercentage=4.0&simulationModel=2&volatility=12.0&distribution=1&endYear=2014&years=7&currentAge=70&bootstrapMaxYears=20&asset1=TIPS&asset2=TIPS&asset3=TotalBond&inflationAdjusted=true&asset4=Commodities&annualOperation=1&asset5=REIT&inflationVolatility=3.13&lifeExpectancyModel=0&bootstrapMinYears=1&inflationMean=4.26&meanReturn=7.0&startYear=1972&bootstrapModel=1&inflationModel=1&initialAmount=1

which give you initial conditions after 7 years of: ~$906014, ~$809,661, respectively. So it means working for ~1 more year if you don't want to mess with investing and just stick everything into TIPS before FI. Or you could roll the dice and put everything in TSM and have on median $912,752 (more variance though). Or you could let Betterment (or another robo with TLH) do everything for you.

And if you really wanted to see the lack of difference of .15% over 7 years.. I could come up with a portfolio with golden butterfly CAGR - .15% fees (6.2% - .15%). I suspect it means working for like one or two extra paychecks?

edit: done:
- more bonds golden butterfly, ~6.05% real CAGR https://www.portfoliovisualizer.com/monte-carlo-simulation?s=y&yearlyWithdrawal=80000&allocation1_1=15&fullHistory=true&allocation4_1=20&allocation5_1=20&allocation2_1=20&allocation3_1=25&circularBootstrap=true&yearlyPercentage=4.0&simulationModel=2&volatility=12.0&distribution=1&endYear=2014&years=7&currentAge=70&bootstrapMaxYears=20&asset1=TotalStockMarket&asset2=IntlStockMarket&asset3=TotalBond&inflationAdjusted=true&asset4=Commodities&annualOperation=1&asset5=REIT&inflationVolatility=3.13&lifeExpectancyModel=0&bootstrapMinYears=1&inflationMean=4.26&meanReturn=7.0&startYear=1972&bootstrapModel=1&inflationModel=1&initialAmount=1

it is a difference of about $9k, which in this hypothetical would be about 2-3 paychecks.

Great points all around! If you don't mind managing a 10-20 fund ETF portfolio, it's a good plan. WiseBanyan would be a great place to implement such a strategy.

Interest Compound

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Re: Betterment
« Reply #46 on: October 21, 2015, 09:57:14 PM »
You are assuming that the Betterment and LifeStrategy allocations will return the same before fees. That isn't necessarily true. I also disagree with your assessment that LifeStrategy is buying individual asset classes low. LifeStrategy has a static allocation and always buys in that allocation. Betterment is buying the asset class that is low at the time of your purchase.

Unless you specifically want a Value oriented portfolio (not recommended), the prospective Betterment customer doesn't see any difference between the LifeStrategy allocation, and the Betterment allocation. Assuming a neutral stance on that, why pay more for an identical-to-you portfolio?

Can you substantiate the mathematical difference between buying low when contributing to an 80/20 fund, and buying low when contributing to an 80/20 ETF portfolio? Do you think you'll see more returns with ETFs? I think you might be misunderstanding how this works.

I don't see a problem with a value-oriented portfolio. Several successful funds have been value tilted.

Several successful funds have been growth tilted too. Several other successful funds have been value tilted, with a different definition of "value". But hey, if you want it, go for it! The biggest difference will probably be a single percentage point or so either way over the next 30 years. Worst case scenario, you come back to the forum in 30 years and we all laugh at you for having only $10 million instead of $12 million like the rest of us who just bought the market index. It won't affect your life either way :)

It's impossible to know the mathematical difference of buying individual ETFS low vs. investing in a fund, the fact is that the a robo advise is mathmetically contributing your new funds to bring your portfolio back into allocation. The fund just stays the same (if you use an all in one fund). I assume the all-in-one fund is smartly run by the managers to minimize gain distributions and such.

thanks
TJ

If it's impossible to know the mathematical difference, why do you prefer one over the other? Genuinely curious.

milesdividendmd

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Re: Betterment
« Reply #47 on: October 21, 2015, 10:18:58 PM »

You are assuming that the Betterment and LifeStrategy allocations will return the same before fees. That isn't necessarily true. I also disagree with your assessment that LifeStrategy is buying individual asset classes low. LifeStrategy has a static allocation and always buys in that allocation. Betterment is buying the asset class that is low at the time of your purchase.

Unless you specifically want a Value oriented portfolio (not recommended), the prospective Betterment customer doesn't see any difference between the LifeStrategy allocation, and the Betterment allocation. Assuming a neutral stance on that, why pay more for an identical-to-you portfolio?

Can you substantiate the mathematical difference between buying low when contributing to an 80/20 fund, and buying low when contributing to an 80/20 ETF portfolio? Do you think you'll see more returns with ETFs? I think you might be misunderstanding how this works.

I don't see a problem with a value-oriented portfolio. Several successful funds have been value tilted.

Several successful funds have been growth tilted too. Several other successful funds have been value tilted, with a different definition of "value". But hey, if you want it, go for it! The biggest difference will probably be a single percentage point or so either way over the next 30 years. Worst case scenario, you come back to the forum in 30 years and we all laugh at you for having only $10 million instead of $12 million like the rest of us who just bought the market index. It won't affect your life either way :)

It's impossible to know the mathematical difference of buying individual ETFS low vs. investing in a fund, the fact is that the a robo advise is mathmetically contributing your new funds to bring your portfolio back into allocation. The fund just stays the same (if you use an all in one fund). I assume the all-in-one fund is smartly run by the managers to minimize gain distributions and such.

thanks
TJ

If it's impossible to know the mathematical difference, why do you prefer one over the other? Genuinely curious.

The value factor is not a question of "some value funds have done well, and some growth funds have done well." 

It's not an anecdote.  It is one of a handful of factors associated with increased equity returns over long time horizons.

This is not a controversial claim. It's not hocus pocus. Its a claim that is well supported by  available academic evidence.

Now you can say, "it's too complicated", or I don't think I can handle periods of negative tracking error going forward. But the overwhelming evidence is that investing in cheap companies brings increased returns.


Aphalite

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Re: Betterment
« Reply #48 on: October 22, 2015, 06:46:18 AM »
The value factor is not a question of "some value funds have done well, and some growth funds have done well." 

It's not an anecdote.  It is one of a handful of factors associated with increased equity returns over long time horizons.

This is not a controversial claim. It's not hocus pocus. Its a claim that is well supported by  available academic evidence.

Now you can say, "it's too complicated", or I don't think I can handle periods of negative tracking error going forward. But the overwhelming evidence is that investing in cheap companies brings increased returns.

I don't think anyone is arguing the theory/evidence that paying a lower price results in higher returns, but look at reality and how such "value" funds are actually performing

VTV (value) vs VUG (growth) - 5.91% over ten years vs 8.09% over ten years, 12.35% over five years vs 14.26%

VOE (midcap value) vs VOT (midcap growth) - 7.63% since inception (2006) vs 7.86^

VBR (small value) vs VBK (small growth) - 7.03% over ten years vs 8.21%

We all agree with the theory, and if these value indexes were actually buying cheap stocks and holding them, they would have a good return, but sometimes you need to look at reality and ask - why are the indexes that supposedly follow this strategy not working out? I suspect it's the execution that's hurting the indexes because I truly believe the theory is sound, but can we agree that ten years is a long enough time horizon to make a decent comparison?

Interest Compound

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Re: Betterment
« Reply #49 on: October 22, 2015, 08:33:01 AM »
I don't think anyone is arguing the theory/evidence that paying a lower price results in higher returns, but look at reality and how such "value" funds are actually performing

VTV (value) vs VUG (growth) - 5.91% over ten years vs 8.09% over ten years, 12.35% over five years vs 14.26%

VOE (midcap value) vs VOT (midcap growth) - 7.63% since inception (2006) vs 7.86^

VBR (small value) vs VBK (small growth) - 7.03% over ten years vs 8.21%

We all agree with the theory, and if these value indexes were actually buying cheap stocks and holding them, they would have a good return, but sometimes you need to look at reality and ask - why are the indexes that supposedly follow this strategy not working out? I suspect it's the execution that's hurting the indexes because I truly believe the theory is sound, but can we agree that ten years is a long enough time horizon to make a decent comparison?

"So investors should not ignore the obvious costs of implementing a strategy that rises, pristinely, out of academic studies that cannot be precisely replicated in the real world."

~Bogle (after watching value mutual funds underperform over the long term)