Reader Case Study - Why is Wealthfront not performing?

[MMM_Avid_5432]

Life Situation: Single, Still in college, stashing most of my money from internships since July 2017.

Gross Salary/Wages: NA

Other Ordinary Income: Periodic each summer

Net assets: Between 10k and 50k


Current expenses:
Food: $250 including occasional restaurant
School Supplies: $75 averaged per month
Car Insurance: $65
Gas: $20 (I bike except for the occasional weekend trip)
Hobbies: $50


Assets: All in Wealthfront (see attached)

Liabilities: No loans

Specific Question(s): Despite my repeated deposits and allocations all showing strong performance, why is my Wealthfront portfolio value basically equal to the net deposits?

Thanks in advance. It's my first post to the board.

[MMM_Avid_5432]

Have you actually cashed anything out yet?  If not, then you don't have realized gains for them to report.

Hard to make sense of the image with so much of the detail blacked out.

I only cashed a bit in late 2017 to fund some school expenses, otherwise it's all still in there. The percentages are all there; only the actual money amounts are blacked out. I'm just wondering why the allocations all show growth, but the net deposits are within 1% of the account value today.

[MMM_Avid_5432]

Yea, I am utilizing all of Wealthfront's recommended features including

"
*Tax-Loss Harvesting
*Stock-level Tax-Loss Harvesting
*Smart Beta
*Risk Parity
Our full suite of strategies that aim to increase returns without more risk.
These strategies activate at various account values."

Money weighted return is defined here (see attached).
It says money weighted return exceeds time-weighted return if deposits are timed well, and with frequent deposits, the numbers converge. I never invested a bunch before any of the recent declines.

[letired]

It might not be subtracting the amount you withdrew, but also this seems like a good question for their support people. My impression is that few forum members are users of Wealthfront or similar services.

[MMM_Avid_5432]

Since the net worth of my investments is less than 50K, I can't use Vanguard. I will contact Wealthfront and ask.

Thanks for the help. This blog has helped me not be a typical broke college student, and thus has given me the freedom to survive just off what I make in the summer. The frugality muscles I'm working on now will make a huge difference in my financial situation when I graduate into a career of engineering.   

[nick663]

Long term and short term gains on the screenshot only show realized amounts.  I have a good amount in 2017 but pretty much $0 in 2018 (haven't withdrawn in 2018).

That being said, I've been pretty unimpressed with performance in wealthfront.  I don't keep a lot in there but this is my porfolio minus deposits on the two milestones in your screenshot:
June 30th, 2017:  +$792.82
Today:  +$738.15

So I'm -$54.67 over that period of time.  Meanwhile, VTSAX is up ~12%.

[secondcor521]

Since the net worth of my investments is less than 50K, I can't use Vanguard.

Huh?  Vanguard will take you on as a client with much less than $50K.  Last time I looked you could open an account with them in a single mutual fund with $3K.  If you buy ETFs, it looks like you can buy a single share for as little as $50.

[wenchsenior]

Since the net worth of my investments is less than 50K, I can't use Vanguard. I will contact Wealthfront and ask.

Thanks for the help. This blog has helped me not be a typical broke college student, and thus has given me the freedom to survive just off what I make in the summer. The frugality muscles I'm working on now will make a huge difference in my financial situation when I graduate into a career of engineering.

Where did you get that idea?  I started using VG with a 5K deposit.

[charis]

Since the net worth of my investments is less than 50K, I can't use Vanguard. I will contact Wealthfront and ask.

Thanks for the help. This blog has helped me not be a typical broke college student, and thus has given me the freedom to survive just off what I make in the summer. The frugality muscles I'm working on now will make a huge difference in my financial situation when I graduate into a career of engineering.

Where did you get that idea?  I started using VG with a 5K deposit.

I opened an IRA with 1K.

[MMM_Avid_5432]

Since the net worth of my investments is less than 50K, I can't use Vanguard. I will contact Wealthfront and ask.

Thanks for the help. This blog has helped me not be a typical broke college student, and thus has given me the freedom to survive just off what I make in the summer. The frugality muscles I'm working on now will make a huge difference in my financial situation when I graduate into a career of engineering.

Where did you get that idea?  I started using VG with a 5K deposit.

I opened an IRA with 1K.

It was somewhere on the blog but I can't find it. Looking at Vanguard's website, I think it came from the fact that it's 50k minimum for most active managed funds. https://investor.vanguard.com/mutual-funds/fees

After some research, I've found that active managed funds from Vanguard have little advantage after tax. (<1% per year)

If I were to switch to Vanguard, would you all recommend I withdraw the entire account at once, or transfer the balance over the span over some time.

[secondcor521]

I think it came from the fact that it's 50k minimum for most active managed funds. https://investor.vanguard.com/mutual-funds/fees

[...]

If I were to switch to Vanguard, would you all recommend I withdraw the entire account at once, or transfer the balance over the span over some time.

That $50K minimum is for Admiral Funds.  Admiral Funds are just a special share class for their mutual funds that gives you even lower expense ratios than regular Vanguard share classes.  You can get started (as others have noted) with as little as $1K to $3K in mutual funds and $50 in ETFs.  When you accumulate enough to qualify for Admiral shares, they'll convert you over automatically and it will not be a taxable event even if the conversion happens in a taxable account.

If you want to move to Vanguard, move to Vanguard.  I don't know why you think there would be any advantage to doing it over time.  In fact the paperwork and taxes are probably easier if you do it all at once.  If you're concerned about the reaction of your current broker, you can call Vanguard and they'll do most of the work for you.

[thd7t]

Since the net worth of my investments is less than 50K, I can't use Vanguard. I will contact Wealthfront and ask.

Thanks for the help. This blog has helped me not be a typical broke college student, and thus has given me the freedom to survive just off what I make in the summer. The frugality muscles I'm working on now will make a huge difference in my financial situation when I graduate into a career of engineering.

Where did you get that idea?  I started using VG with a 5K deposit.

I opened an IRA with 1K.

It was somewhere on the blog but I can't find it. Looking at Vanguard's website, I think it came from the fact that it's 50k minimum for most active managed funds. https://investor.vanguard.com/mutual-funds/fees

After some research, I've found that active managed funds from Vanguard have little advantage after tax. (<1% per year)

If I were to switch to Vanguard, would you all recommend I withdraw the entire account at once, or transfer the balance over the span over some time.

You do not want actively managed funds anywhere!  You should find some passive index funds (Vanguard's are great) and put your money there and forget it (until you put more there).  You should put it all in at once.  Time in the market is the most important thing.

[PizzaSteve]

Since the net worth of my investments is less than 50K, I can't use Vanguard. I will contact Wealthfront and ask.

Thanks for the help. This blog has helped me not be a typical broke college student, and thus has given me the freedom to survive just off what I make in the summer. The frugality muscles I'm working on now will make a huge difference in my financial situation when I graduate into a career of engineering.

Where did you get that idea?  I started using VG with a 5K deposit.

I opened an IRA with 1K.

It was somewhere on the blog but I can't find it. Looking at Vanguard's website, I think it came from the fact that it's 50k minimum for most active managed funds. https://investor.vanguard.com/mutual-funds/fees

After some research, I've found that active managed funds from Vanguard have little advantage after tax. (<1% per year)

If I were to switch to Vanguard, would you all recommend I withdraw the entire account at once, or transfer the balance over the span over some time.

You do not want actively managed funds anywhere!  You should find some passive index funds (Vanguard's are great) and put your money there and forget it (until you put more there).  You should put it all in at once.  Time in the market is the most important thing.

+1.  Recommend passive total stock market index funds or their ETF equivalents at a broker like Schwab, etrade, Vanguard or Fidelity. Set at autoinvest and forget.

[neil]

It is Wealthfront's responsibility to make you understand.  I recommend not investing in anything you don't understand.  A core reason VTI is recommended is because it's crystal clear what that represents when you're buying it.

I will say that regarding US stocks, VTSAX is probably up around 14% from approx. June 2017.  The real world problem is that when you put money in over time, your real returns are going to reflect those variable return profiles, so many of your purchases have much less gain (or even losses, for recent purchases).  This would apply to all asset classes.  I get a yearly bonus at the end of January and it sucks for years like this one where the market temporarily peaks on that given date, but there's not a lot I can do about it.  It seems deceptive to show the GUI like this and I'm sure it's intentional.

Keep in mind that you'll be investing much more money over your lifetime than you have now, and there's no real benefit to being complicated if you're not sure.  If, after learning and investigating, you want a Wealthfront-type service and behavior when you're at or near retirement, that's certainly fine and you can go that route.  But if you take your early investing and just do something simple (i.e. VTI) while you're figuring that out, you're not missing out on anything.  This should be money you never need except for dire emergencies and there's no reason to have a complicated asset allocation by putting some trivial amount into gold, commodities and bonds.  Tax-loss harvesting isn't going to be the key to making you financially secure (you still need to actually save money in the first place) and doubly so if your tax rate is basically zero.

[Indexer]

I think this all comes down to time weighted returns VS money weighted returns.

Time weighted = how did the investments perform over the time period since your initial contribution. This doesn't take into account new contributions and withdrawals. I'm pretty sure this is how it's calculating the returns for each asset class.

Money weighted returns = this takes into account when you actually made each contribution and the returns after each contribution. On the picture this is slightly down, let's call it flat.


Easy to follow example: You contribute $1 and it doubles in value to $2.  100% returns.
Then you contribute $8 more, so you have $10.
Markets drop 20%. Now you have $8.

Time weighted returns:  +100% and then down 20%, taking into account compounding = 60% returns. [Math: X*2=2X, 2X*0.8 = 1.6X.  (1.6X-X)/X = 60%]

Money weighted returns: you contributed 9$ and you have $8, -11% returns.


You have the textbook case for a situation where these two numbers would be very different. Your contributions started in the middle of 2017, a great period for markets, so your time weighted returns look great. However, you kept contributing in 2018, a year with a ton of volatility, and markets are down from their peeks. You were probably contributing when markets were higher than they are now.

Conclusion: your 2017 contributions have risen in value but your 2018 contributions are flat or down, giving you a net flat return.


EDIT: added example.

[marty998]

"
*Tax-Loss Harvesting
*Stock-level Tax-Loss Harvesting
*Smart Beta
*Risk Parity
Our full suite of strategies that aim to increase returns without more risk.
These strategies activate at various account values."

I call bullshit on this piece of marketing spin.

You cannot increase expected returns without increasing risk.

[DS]

"
*Tax-Loss Harvesting
*Stock-level Tax-Loss Harvesting
*Smart Beta
*Risk Parity
Our full suite of strategies that aim to increase returns without more risk.
These strategies activate at various account values."

I call bullshit on this piece of marketing spin.

You cannot increase expected returns without increasing risk.

To me, they are basically saying they are offering diversification:

Different Types of Risk
Investors confront two main types of risk when investing:

Undiversifiable - Also known as "systematic" or "market risk," undiversifiable risk is associated with every company. Common causes are things like inflation rates, exchange rates, political instability, war, and interest rates. This type of risk is not specific to a particular company or industry, and it cannot be eliminated or reduced through diversification; it is just a risk that investors must accept.
Diversifiable - This risk is also known as "unsystematic risk," and it is specific to a company, industry, market, economy, or country; it can be reduced through diversification. The most common sources of unsystematic risk are business risk and financial risk. Thus, the aim is to invest in various assets so that they will not all be affected the same way by market events.

[MMM_Avid_5432]

Many thanks for the explanations. I sent an inquiry to WealthFront regarding this, and it turns out their allocation percentages are time weighted. Here is what they sent me:

Hi Ryan,

To answer your question, the asset class returns you see on your account history chart shows the Time-Weighted Returns for each asset class from the time your account started investing in that asset class. 

Time-weighted rate of return is sensitive to the timing of your initial investment, but not to the timing of any subsequent deposits or withdrawals. Money-weighted return takes into account the deposits and withdrawals you make over time. Money-weighted return is often a better measure of how you manage your contributions and withdrawals than how your investment manager performs. You've made several deposits into your account this year when the market has been relatively volatile which explains the discrepancy between the numbers.

You can read more about different returns and how to we calculate them here: How do you calculate the return displayed on my dashboard and account pages?

For more context on our approach, I'd recommend reading this blog post: Global diversification: Why you should invest in foreign and emerging markets. Please keep in mind that our portfolios are designed for long-term investing, which we define as at least five years. As our CIO often says, markets go up and markets go down. You cannot control them. What you can control is your asset allocation per your risk tolerance, your fees, your taxes and investing for the long run. That is the goal of a Wealthfront account.

I'd recommend reading these links for more information:
Advice for Investors
Invest Despite Volatility

Let us know if you have any other questions.

Indexer basically nailed it on the head with why my money weighted return is so poor (currently negative 2%). This is because my portfolio was not that big during the greatest rise of stocks in late 2017, and I have now invested a bunch of money in summer 2018 that was in stocks worth more than they are now. Since these contributions were large relative to my total portfolio, the recent downturn has erased all the previous gains in 2017.

I was a bit confused on what "active funds" were. I initially thought that mean automatic dividend reinvesting and portfolio re balancing, but that's not true. I want those features because I want to leave the money alone in a diverse portfolio, which is why I chose Wealthfront. At this point, I can't really say whether Wealthfront is limiting my returns, or that it's just lower risk.

Going off that, Wealthfront says that smaller withdraws result in less taxes because they can pick with investments.
https://support.wealthfront.com/hc/en-us/articles/211007423-How-does-Wealthfront-choose-which-investments-to-sell-when-I-withdraw-
https://support.wealthfront.com/hc/en-us/articles/211007403-Will-I-have-to-pay-taxes-on-money-withdrawn-from-Wealthfront-

This was the reason I said earlier that I thought it would be better to not withdraw everything at once.

Based on the information I've provided, and the current high volatility of the market, would you still recommend I transfer 100% of my Wealthfront to Vanguard VTI or something similar?
If so, are there any funds through Vanguard that diversify across US and international markets? Since I have less than 50k, admiral funds are not an option in the near future.
I'm currently educating myself on the various options.

Neil brought an interesting point about how I shouldn't expect to need any of the money in the near future. Graduate school may bring on a few additional expenses, so I'm looking into it now to see how much I plan to not touch for the next ~5 years.

Many thanks for the help.

[letired]

Where are you getting that 50k number?

You can invest in Vanguard Total Stock Market Investor version for 3k, and the Admiral version for 10k. Same for their Total International fund.


source: https://investor.vanguard.com/mutual-funds/fees


source: https://investor.vanguard.com/investing/benefits/at-a-glance




source: https://investor.vanguard.com/mutual-funds/profile/fees/vtsax https://investor.vanguard.com/mutual-funds/profile/fees/vtsmx

[Indexer]

Indexer basically nailed it on the head with why my money weighted return is so poor (currently negative 2%)...


Based on the information I've provided, and the current high volatility of the market, would you still recommend I transfer 100% of my Wealthfront to Vanguard VTI or something similar?
If so, are there any funds through Vanguard that diversify across US and international markets? Since I have less than 50k, admiral funds are not an option in the near future.
I'm currently educating myself on the various options.

Neil brought an interesting point about how I shouldn't expect to need any of the money in the near future. Graduate school may bring on a few additional expenses, so I'm looking into it now to see how much I plan to not touch for the next ~5 years.

Many thanks for the help.

Glad I could help. Time weighted VS money weighted can cause a lot of confusion.

VTI or VTSAX(mutual fund version of VTI) is good for US stocks.
VXUS or VTIAX is good for international stocks.

Combined, VTI & VXUS(or VTSAX & VTIAX), give you exposure to about 10k stocks worldwide. That's plenty of diversification on the stock side.

If you want to add bonds I would look at BND(VBTLX).

[MMM_Avid_5432]

Indexer basically nailed it on the head with why my money weighted return is so poor (currently negative 2%)...


Based on the information I've provided, and the current high volatility of the market, would you still recommend I transfer 100% of my Wealthfront to Vanguard VTI or something similar?
If so, are there any funds through Vanguard that diversify across US and international markets? Since I have less than 50k, admiral funds are not an option in the near future.
I'm currently educating myself on the various options.

Neil brought an interesting point about how I shouldn't expect to need any of the money in the near future. Graduate school may bring on a few additional expenses, so I'm looking into it now to see how much I plan to not touch for the next ~5 years.

Many thanks for the help.

Glad I could help. Time weighted VS money weighted can cause a lot of confusion.

VTI or VTSAX(mutual fund version of VTI) is good for US stocks.
VXUS or VTIAX is good for international stocks.

Combined, VTI & VXUS(or VTSAX & VTIAX), give you exposure to about 10k stocks worldwide. That's plenty of diversification on the stock side.

If you want to add bonds I would look at BND(VBTLX).

Perfect. Since I  have over 10k in wealthfront, I'm going to transfer 10k in VTSAX. Since all the stocks are on sale, I should be able to do some contracting work over the next few weeks and dump it all into VTSAX for the long term. I'm not expecting to take any of it out in the next 5 years until I start considering purchasing a home.

[NVDee]

Realize that changing to VTI will reduce the global diversification you have with your current account.  Changing your account manager does not change the performance of the global or US markets, it only changes your fee structure and service level. 

Another option would be VT plus a small percentage of BND if you change to Vanguard. 

https://investor.vanguard.com/etf/profile/VT

[jacoavluha]

analyzing and changing course based on short term portfolio performance is one of the worst things you can do

before you change anything, I would come up with a long term investing plan. Then, stay the course and don't change based on short term market fluctuations.

[MMM_Avid_5432]

analyzing and changing course based on short term portfolio performance is one of the worst things you can do

before you change anything, I would come up with a long term investing plan. Then, stay the course and don't change based on short term market fluctuations.

Just an update - I decided to hold onto my Wealthfront assets and invest a bit more into at as I could from internship. I also opened up their 2.32% cash account of which I keep 2 months of living expenses in.

I have a job lined up for graduation. Their 401k plan is bad so I wanted to set up a Roth IRA. Unfortunately it appears I can only contribute $6000 to that per year.

Would it be a good time next year to consider switching investment portfolios to Vanguard and throwing what I can into that?

Based on my current expenses, if I avoid lifestyle creep, I could save at 70% :)

[slow hand slow plan]

You should post what funds the 401k at the new job offers. Some 401ks even with fees will be a better investment due to the tax implications then just investing after tax in a brokerage

[MMM_Avid_5432]

You should post what funds the 401k at the new job offers. Some 401ks even with fees will be a better investment due to the tax implications then just investing after tax in a brokerage

Ok. I will inquire about the plan details.

[MMM_Avid_5432]

I finally got access to the plan details and will post them shortly. They don't share until enrollment starts. 

For now I decided to max out both my Roth IRA, 401k, and the company stock purchase plan. The company has a 401k match up to 3k per year and also 15% stock discount. This puts me at saving 50% of my pre-tax income. If I decide to save even more, I can stash the remaing funds in Wealthfront unless you all have better ideas.

Side note: My wealthfront had 23% return in 2019. I used the gains to fund a trip across the world. Was pretty cool getting a taste for how much my money can work for me. There were a number of weeks my investments gained more value than I got working a part time job.

[MustacheAndaHalf]

I can understand a once in a lifetime travel, but if you make selling your investments and traveling a habit, that's unlikely to produce a nest egg for retirement.

At Vanguard you can buy a single share of an ETF if you want.  That's typically $50 to $200/share, so the minimums are even lower than for mutual funds.  You could buy S&P 500, international, emerging markets and municipal bonds all in ETF form.