Author Topic: Betterment for taxable holdings.  (Read 24685 times)

capital

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Betterment for taxable holdings.
« on: January 19, 2015, 10:46:33 PM »
I am approaching $50,000 in my taxable investment account. I am in a relatively high tax bracket in an area with high income taxes (NYC). Currently my taxable holdings are in VFIFX held via Vanguard.

I already make the maximum contribution to my 401k & Roth IRA.

My understanding of people's opinion's on Betterment is that the higher fees make it a bad deal for tax-advantaged accounts, but the tax-loss harvesting can make it a good deal on taxable accounts, especially for those with a relatively high marginal tax rate.

I am thinking about either moving my taxable account to Betterment or transferring my Vanguard holdings to the equivalent holdings to VFIFX in Admiral funds, with my current bias toward the former due to the tax-loss harvesting feature. Let me know if I am missing anything.

(As a note, I suppose when I move investments I should ensure I only sell shares of funds I bought over a year ago in order to pay long-term capital gains taxes, which implies I should merely make new purchases and slowly move old shares over to Betterment (or other Vanguard funds) rather than a move all at once. Does that sound correct?)

innerscorecard

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Re: Betterment for taxable holdings.
« Reply #1 on: January 19, 2015, 11:29:50 PM »
They're definitely fantastic marketers. Everyone repeats the line about tax-loss harvesting.

The truth is that the excess after-tax performance of tax-loss harvesting will stop helping you after a short period of time.

And you can do it yourself, too.
« Last Edit: January 20, 2015, 12:17:33 AM by innerscorecard »

RapmasterD

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Re: Betterment for taxable holdings.
« Reply #2 on: January 19, 2015, 11:48:28 PM »
I love Betterment because of the tax loss harvesting they provide. And they do it robotically. Amazing.

Honest Abe

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Re: Betterment for taxable holdings.
« Reply #3 on: January 20, 2015, 03:51:43 AM »
It harvested $2500 in losses for me in a largely up year for the market. I didn't have to pay attention to anything. Two thumbs up.

innerscorecard

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Re: Betterment for taxable holdings.
« Reply #4 on: January 20, 2015, 04:38:44 AM »
It harvested $2500 in losses for me in a largely up year for the market. I didn't have to pay attention to anything. Two thumbs up.

Thank you for sharing an actual number. But what was your total amount invested?

Louisville

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Re: Betterment for taxable holdings.
« Reply #5 on: January 20, 2015, 05:59:37 AM »
The truth is that the excess after-tax performance of tax-loss harvesting will stop helping you after a short period of time.
Please explain why.

rmendpara

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Re: Betterment for taxable holdings.
« Reply #6 on: January 20, 2015, 09:56:35 AM »
The truth is that the excess after-tax performance of tax-loss harvesting will stop helping you after a short period of time.
Please explain why.

There's only so much that you can actually use to offset taxes in a given year. 3k is the recent deduction limit, I believe? (someone please correct me)

You can carry forward some losses, but the benefit is then deferred, reducing its value.

For a 60k portfolio, and a 25% tax bracket, deducting 3k will save you roughly 750 come tax time less the account fees. As the portfolio grows, the benefit goes down as a percentage of your invested assets. As your tax rate increases, the deduction will become more valuable, but there's a realistic limit to this.

Ignoring state/local taxes on investment losses, if you are at the max federal rate, 39.6% (again, someone correct me), your max benefit is 3k x .396 or 1,188 max benefit. Not to say this is useless, but it's close to chump change if you have that type of income or a very large asset base. At those levels, most people could/should be more focused on getting to the right allocation and overall portfolio structure rather than trying to save nickels and dimes, relatively...

Dodge

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Re: Betterment for taxable holdings.
« Reply #7 on: January 20, 2015, 05:29:08 PM »
The truth is that the excess after-tax performance of tax-loss harvesting will stop helping you after a short period of time.
Please explain why.

I've posted lots of fun charts and excel sheets on this topic here:

http://forum.mrmoneymustache.com/investor-alley/betterment-$50k-'safety-net'/msg487131/#msg487131

Long story short, Tax Loss Harvesting has the opportunity for a good benefit the first year, but it doesn't always happen.  And unfortunately, after the first year (2-3 if you're "lucky" enough to have a 2008 crash), that same money never sees another dime in tax loss harvesting.  This has been the case for every single year that the ETFs in Betterment's portfolio have been around.  If you're investing with the expectation that your money will grow, you must also acknowledge that Tax Loss Harvesting on any one particular deposit will eventually not be possible (there will be no losses to harvest).  After a few years, the cost from the higher fee will negate the early benefit from TLH, and it's all downhill from there.

Said another way, why pay a higher percentage fee on your portfolio, each and every year, for the rest of your life...to save a few hundred bucks the first year?

Honest Abe

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Re: Betterment for taxable holdings.
« Reply #8 on: January 20, 2015, 06:46:44 PM »
It harvested $2500 in losses for me in a largely up year for the market. I didn't have to pay attention to anything. Two thumbs up.

Thank you for sharing an actual number. But what was your total amount invested?

Happy to help.. At the time, between $58-68k in my taxable account with them.

josstache

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Re: Betterment for taxable holdings.
« Reply #9 on: January 20, 2015, 07:18:51 PM »

Said another way, why pay a higher percentage fee on your portfolio, each and every year, for the rest of your life...to save a few hundred bucks the first year?

Because when you're no longer in the accumulation phase, you can take your money out of Betterment and put it somewhere else.

Dodge

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Re: Betterment for taxable holdings.
« Reply #10 on: January 20, 2015, 08:01:30 PM »

Said another way, why pay a higher percentage fee on your portfolio, each and every year, for the rest of your life...to save a few hundred bucks the first year?

Because when you're no longer in the accumulation phase, you can take your money out of Betterment and put it somewhere else.

Unless your accumulation phase is less than a year or two, chances are you'd be better off never putting your money there in the first place, as the higher fee will already have dwarfed any TLH gains.  In any case, let's explore your options.  You'll either have to:

1.  Move your assets out of Betterment in-kind, meaning you don't have to sell the funds, they simply move over to the new broker.  You now have up to 24 individual ETFs (the main 12 + the 12 they use for Tax Loss Harvesting) to manually manage, and rebalance, for the rest of your life.  This is not consistent with the reasons people choose Betterment in the first place, for simplicity.  If you're willing to do this, you might as well start out with a 3 fund portfolio at Vanguard, and bring your ER down to 0.07%, instead of the 0.35%-0.51% yearly fee you'll be paying at Betterment.  You'll save even more in fees, and end up with a simpler to manage and more diversified (in terms of individual assets held) portfolio.

or

2.  You liquidate your assets and transfer the cash out of Betterment.  Now you have a huge capital gains tax bill, which will dwarf any possible gain from Tax Loss Harvesting.  Also, any gains received from Tax Loss Harvesting will be immediately due, as your cost basis is now lower than it otherwise would have been.

Neither of those choices put you ahead.

innerscorecard

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Re: Betterment for taxable holdings.
« Reply #11 on: January 20, 2015, 08:07:58 PM »
All pyramid schemes are good value propositions, if you're higher up on the pyramid.

looking for FI

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Re: Betterment for taxable holdings.
« Reply #12 on: January 20, 2015, 08:16:26 PM »
I am approaching $50,000 in my taxable investment account. I am in a relatively high tax bracket in an area with high income taxes (NYC). Currently my taxable holdings are in VFIFX held via Vanguard.

I already make the maximum contribution to my 401k & Roth IRA.

My understanding of people's opinion's on Betterment is that the higher fees make it a bad deal for tax-advantaged accounts, but the tax-loss harvesting can make it a good deal on taxable accounts, especially for those with a relatively high marginal tax rate.

I am thinking about either moving my taxable account to Betterment or transferring my Vanguard holdings to the equivalent holdings to VFIFX in Admiral funds, with my current bias toward the former due to the tax-loss harvesting feature. Let me know if I am missing anything.

(As a note, I suppose when I move investments I should ensure I only sell shares of funds I bought over a year ago in order to pay long-term capital gains taxes, which implies I should merely make new purchases and slowly move old shares over to Betterment (or other Vanguard funds) rather than a move all at once. Does that sound correct?)

If you qualify to contribute to a roth IRA I would bet you are not paying a high marginal tax rate.

pzxc

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Re: Betterment for taxable holdings.
« Reply #13 on: January 20, 2015, 08:20:53 PM »
All pyramid schemes are good value propositions, if you're higher up on the pyramid.

That's... nevermind.

capital

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Re: Betterment for taxable holdings.
« Reply #14 on: January 20, 2015, 08:29:08 PM »
I am approaching $50,000 in my taxable investment account. I am in a relatively high tax bracket in an area with high income taxes (NYC). Currently my taxable holdings are in VFIFX held via Vanguard.

I already make the maximum contribution to my 401k & Roth IRA.

My understanding of people's opinion's on Betterment is that the higher fees make it a bad deal for tax-advantaged accounts, but the tax-loss harvesting can make it a good deal on taxable accounts, especially for those with a relatively high marginal tax rate.

I am thinking about either moving my taxable account to Betterment or transferring my Vanguard holdings to the equivalent holdings to VFIFX in Admiral funds, with my current bias toward the former due to the tax-loss harvesting feature. Let me know if I am missing anything.

(As a note, I suppose when I move investments I should ensure I only sell shares of funds I bought over a year ago in order to pay long-term capital gains taxes, which implies I should merely make new purchases and slowly move old shares over to Betterment (or other Vanguard funds) rather than a move all at once. Does that sound correct?)

If you qualify to contribute to a roth IRA I would bet you are not paying a high marginal tax rate.
Relatively high marginal tax rate. I am a single childless renter, so I have no major deductions available. I am also paying NYS & NYC income taxes, which add a few percentage points on the top. And I actually may not be able to put much in the Roth this year, so maybe I need a new plan for my tax refund.

josstache

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Re: Betterment for taxable holdings.
« Reply #15 on: January 20, 2015, 08:47:14 PM »
A few points:

The whole point of the complicated portfolio is to deliver superior returns to a less complicated one, as it has a heavy value tilt, and (in my view) appropriate split between US and international.

Obviously the downside of the complicated portfolio is the effort it would take to manage yourself - but with Betterment you don't need to.  If a combination of (i) the portfolio itself, (ii) automated rebalancing and (iii) their "TLH+" creates an extra return of 0.15% vs the do-it-myself portfolio, Betterment pays for itself.

Once I am out of the accumulation phase (and perhaps out of Betterment), I will by definition be FIRE'd, and would have the time and inclination to manage a more complicated portfolio so long as I expected higher returns from it. Or I may decide the 0.15% is worth it to be completely hands off.  Additionally, other brokerages are setting up their own (free?) roboadvisors, so it may become possible to rollover to them and keep the same portfolio if they want to steal Betterment customers.
« Last Edit: January 20, 2015, 08:50:44 PM by josstache »

RapmasterD

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Re: Betterment for taxable holdings.
« Reply #16 on: January 20, 2015, 08:50:20 PM »
>>Part of me finds these repetitive Betterment threads to be amusing, mostly due to snarky comments from folks like me.

>>Part of me thinks our famous Las Vegas-based forum moderator should write a brief sticky post at the top of THIS forum recommending what one should post about Betterment that is net new. Maybe this is not feasible, but man...it seems we cover the same ground on this one. And with that said....

...I think Betterment is a complete joke, designed for hipster software company middle managers with thick black glasses and annoying beards who listen to way too much Grizzly Bear, as well as aging MDs from Portland (oh come on Miles...just kidding). NEXT!
« Last Edit: January 20, 2015, 08:52:22 PM by RapmasterD »

Dodge

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Re: Betterment for taxable holdings.
« Reply #17 on: January 20, 2015, 08:50:52 PM »
It harvested $2500 in losses for me in a largely up year for the market. I didn't have to pay attention to anything. Two thumbs up.

Thank you for sharing an actual number. But what was your total amount invested?

Happy to help.. At the time, between $58-68k in my taxable account with them.

For any newbies following along:
  • A $68,000 account at Betterment will pay a fee of: $280 a year.
  • The benefit from the $2,500 deduction depends on your tax bracket, but for most of us will likely be about: $750
  • $68,000 invested in the Vanguard fully automatic fund equivalent would cost: $108 a year.
  • $68,000 invested in a 3 fund portfolio at Vanguard would cost: $47 a year.
  • History shows that on average, a deposit will no longer receive any Tax Loss Harvesting activity, past the first year.
Let's see what this looks like moving forward, assuming an 11.5% growth rate:

Year 1 Account Balance: $68,000 + $750 from TLH = $68,750
Total Fees Paid So Far: $280
Total Benefit So Far: $750

Year 2 Account Balance: $75,894
Total Fees Paid So Far: $591
Total Benefit So Far: $750

Year 3 Account Balance: $84,275
Total Fees Paid So Far: $937
Total Benefit So Far: $750

Year 4 Account Balance: $93,581
Total Fees Paid So Far: $1,321
Total Benefit So Far: $750

Assuming identical gains, how much total over these 4 years would you have paid in fees to Vanguard's fully automatic fund? $517
Assuming identical gains, how much total over these 4 years would you have paid in fees using a Vanguard 3 fund portfolio?  $226

Not only does it get worse as time goes on, it gets worse faster.

P.S.  The maintenance on a 3 fund portfolio is literally 5-10 minutes a year, assuming you actually have to rebalance that year (most years you won't, especially if you're making automatic contributions).  I walk through the process here:

http://forum.mrmoneymustache.com/investor-alley/a-slightly-different-way-to-compare-betterment-and-vanguard/msg493423/#msg493423
« Last Edit: January 20, 2015, 09:03:17 PM by Dodge »

RapmasterD

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Re: Betterment for taxable holdings.
« Reply #18 on: January 20, 2015, 08:55:01 PM »
Well done, Dodge. Thank you.

josstache

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Re: Betterment for taxable holdings.
« Reply #19 on: January 20, 2015, 09:05:45 PM »
If you assume the conclusion, you can reach any conclusion you like.  "Assume Betterment and the three-fund portfolio will have the same return."

Indeed, if I assume my own individual stock picks will have the same return as the three-fund portfolio, that's even better, because there are no fees whatsoever so long as I buy and hold, which I assume I will do.

pzxc

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Re: Betterment for taxable holdings.
« Reply #20 on: January 20, 2015, 09:17:29 PM »
Another benefit completely disregarded so far:  you can get started with Betterment for only $100/mo.  For anybody who doesn't have the minimum to open a Vanguard account, delaying until you do is guaranteed to drastically lower the success rate.  Better to get started NOW, even if it's $1/mo or whatever you can do, increases your chances of winning in the end.  The best time to plant a tree is 20 years ago - the second best time is today.  If group A says to themselves, "I'll open that Roth IRA in a few weeks after I've saved up a couple grand for it", and group B finds a way to open a roth IRA right now and put in a nickel, the number of people who end up sticking with it is gonna be higher in group B.

(Note: maybe you can buy shares in one of the low-cost vanguard index funds for a small amount now, I dunno, but you couldn't when I started last year)

Dodge

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Re: Betterment for taxable holdings.
« Reply #21 on: January 20, 2015, 09:18:07 PM »
If you assume the conclusion, you can reach any conclusion you like.  "Assume Betterment and the three-fund portfolio will have the same return."

Indeed, if I assume my own individual stock picks will have the same return as the three-fund portfolio, that's even better, because there are no fees whatsoever so long as I buy and hold, which I assume I will do.

The comparison was made, simply to show how fees will drag the portfolio.  Your assertion does not negate that.

innerscorecard

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Re: Betterment for taxable holdings.
« Reply #22 on: January 20, 2015, 09:31:13 PM »
I wish I had come up with Betterment. It's a great idea for the shareholders of Betterment. Asset management truly is a fantastic business.

pzxc

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Re: Betterment for taxable holdings.
« Reply #23 on: January 20, 2015, 09:39:33 PM »
Actually Betterment just copied Wealthfront.

Most of the wealthy tech people in silicon valley use Wealthfront.

But they, too, have a minimum - $5k I think?

So I chose Betterment.  Yeah, I'm not ashamed to endorse them, don't care if that makes me a fanboy. They let me open a roth IRA when everybody else said I needed at least $2k, and I'm learning a ton by seeing the asset allocation they've picked for me and investigating why, and it's cost me a total of 40 cents in fees for the last six months.  (Cuz I don't even have a grand invested yet)

For somebody who has half a million bucks and on the cusp of FIRE, yeah Vanguard is probably a better choice. That doesn't mean Betterment doesn't have a place.  Not everybody is in the same place on the journey.  I think you rich mofos sometimes forget what it's like to be just getting started :P

Besides, for the sake of not having all your eggs in one basket, it doesn't hurt to spread it around does it?  I have a bit of money in Lending Club too, maybe that's not the wisest investment either but that doesn't mean it's not a good idea for me and where I'm at on my investing journey :)

Failure is the key to learning and learning is the key to winning.  So, you see, even if we betterment investors lose, that just means we learn faster than you, and then we win anyway in the end =P
« Last Edit: January 20, 2015, 09:44:36 PM by pzxc »

Dodge

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Re: Betterment for taxable holdings.
« Reply #24 on: January 20, 2015, 09:47:28 PM »
A few points:

The whole point of the complicated portfolio is to deliver superior returns to a less complicated one, as it has a heavy value tilt, and (in my view) appropriate split between US and international.

Obviously the downside of the complicated portfolio is the effort it would take to manage yourself - but with Betterment you don't need to.  If a combination of (i) the portfolio itself, (ii) automated rebalancing and (iii) their "TLH+" creates an extra return of 0.15% vs the do-it-myself portfolio, Betterment pays for itself.

Once I am out of the accumulation phase (and perhaps out of Betterment), I will by definition be FIRE'd, and would have the time and inclination to manage a more complicated portfolio so long as I expected higher returns from it. Or I may decide the 0.15% is worth it to be completely hands off.  Additionally, other brokerages are setting up their own (free?) roboadvisors, so it may become possible to rollover to them and keep the same portfolio if they want to steal Betterment customers.

You have been sold on a marketing gimmick.  You seem like a sophisticated investor, why pay a yearly 0.31-0.51% fee on your portfolio, each and every year, to possibly save yourself a few minutes of rebalancing time (which likely won't be necessary that year, especially if you're in the accumulation phase)?  I recommend trying it.  Open a Vanguard account, turn on Automatic Investments, choose your 4 funds, and that's it.  No need to even login to your account anymore, unless you want to change the auto-deposit.  After one year, log in to your account.  Put the numbers into a calculator, and see if the percentages are more than 5% off.  If it looks like this (my screenshot has 3 funds, but it's not much different with 4) , then great!  No need to rebalance this year!  Feel free to logout knowing you won't have to sign back in for another year.



If the numbers are off, spend the next few minutes buying/selling as indicated on the right:



And that's it!  You're done for the year.  The fee for such a portfolio is about 0.08%, compared to 0.41% had the money been with Betterment.  No need to hope Tax Loss Harvesting gives you a big enough benefit this year to offset the extra fees, and no need to worry about Betterment switching things up on you.

RapmasterD

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Re: Betterment for taxable holdings.
« Reply #25 on: January 20, 2015, 10:03:12 PM »
<<Most of the wealthy tech people in silicon valley use Wealthfront.>>

pzxc - What is the minimum liquid net worth barrier for being a "wealthy tech person?"

And specifically, how many Silicon Valley wealthy tech people do you know who use Wealthfront?

Because 90% of the wealthy tech people I know, probably about 30 people with a liquid net worth > $10 million, use financial advisers.

But perhaps your threshold is lower than $10 million. Here in Silicon Valley, mine is not. So....what is yours? And again, numbers of people you know who use Wealthfront?

P.S. You can shoot the messenger, but I didn't pull that 10 mil # out of my ass. LINK: http://www.nytimes.com/2007/08/05/technology/05rich.html?pagewanted=print
« Last Edit: January 20, 2015, 10:10:14 PM by RapmasterD »

RapmasterD

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Re: Betterment for taxable holdings.
« Reply #26 on: January 20, 2015, 10:12:12 PM »
It harvested $2500 in losses for me in a largely up year for the market. I didn't have to pay attention to anything. Two thumbs up.

Thank you for sharing an actual number. But what was your total amount invested?

Happy to help.. At the time, between $58-68k in my taxable account with them.

For any newbies following along:
  • A $68,000 account at Betterment will pay a fee of: $280 a year.
  • The benefit from the $2,500 deduction depends on your tax bracket, but for most of us will likely be about: $750
  • $68,000 invested in the Vanguard fully automatic fund equivalent would cost: $108 a year.
  • $68,000 invested in a 3 fund portfolio at Vanguard would cost: $47 a year.
  • History shows that on average, a deposit will no longer receive any Tax Loss Harvesting activity, past the first year.
Let's see what this looks like moving forward, assuming an 11.5% growth rate:

Year 1 Account Balance: $68,000 + $750 from TLH = $68,750
Total Fees Paid So Far: $280
Total Benefit So Far: $750

Year 2 Account Balance: $75,894
Total Fees Paid So Far: $591
Total Benefit So Far: $750

Year 3 Account Balance: $84,275
Total Fees Paid So Far: $937
Total Benefit So Far: $750

Year 4 Account Balance: $93,581
Total Fees Paid So Far: $1,321
Total Benefit So Far: $750

Assuming identical gains, how much total over these 4 years would you have paid in fees to Vanguard's fully automatic fund? $517
Assuming identical gains, how much total over these 4 years would you have paid in fees using a Vanguard 3 fund portfolio?  $226

Not only does it get worse as time goes on, it gets worse faster.

P.S.  The maintenance on a 3 fund portfolio is literally 5-10 minutes a year, assuming you actually have to rebalance that year (most years you won't, especially if you're making automatic contributions).  I walk through the process here:

http://forum.mrmoneymustache.com/investor-alley/a-slightly-different-way-to-compare-betterment-and-vanguard/msg493423/#msg493423

You know I'm with you, brother, but what about the tax loss harvesting pap? Right now I've got my Vanguard holdings set up as FIFO, which I imagine is NOT ideal for me to manually undertake tax loss harvesting. Any thoughts here?

pzxc

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Re: Betterment for taxable holdings.
« Reply #27 on: January 20, 2015, 10:13:57 PM »
Okay, obviously I don't know "most of the wealthy tech people in silicon valley" and neither do you, because there are thousands and thousands of them and one person can't know them or even most.

If you were seriously asking though and not just being snarky, I meant *young* wealthy tech people, the startup crowd, ycombinator types, it is very popular with them.

Scandium

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Re: Betterment for taxable holdings.
« Reply #28 on: January 21, 2015, 07:07:23 AM »
Actually Betterment just copied Wealthfront.

Most of the wealthy tech people in silicon valley use Wealthfront.

But they, too, have a minimum - $5k I think?

So I chose Betterment.  Yeah, I'm not ashamed to endorse them, don't care if that makes me a fanboy. They let me open a roth IRA when everybody else said I needed at least $2k, and I'm learning a ton by seeing the asset allocation they've picked for me and investigating why, and it's cost me a total of 40 cents in fees for the last six months.  (Cuz I don't even have a grand invested yet)

For somebody who has half a million bucks and on the cusp of FIRE, yeah Vanguard is probably a better choice. That doesn't mean Betterment doesn't have a place.  Not everybody is in the same place on the journey.  I think you rich mofos sometimes forget what it's like to be just getting started :P

Besides, for the sake of not having all your eggs in one basket, it doesn't hurt to spread it around does it?  I have a bit of money in Lending Club too, maybe that's not the wisest investment either but that doesn't mean it's not a good idea for me and where I'm at on my investing journey :)

Failure is the key to learning and learning is the key to winning.  So, you see, even if we betterment investors lose, that just means we learn faster than you, and then we win anyway in the end =P

Perhaps, but remember that due to tax reasons, as your wealth grows it become harder and harder to move your money. So think of choosing a broker as a marriage. After 10-20 years of gains it would be a huge pain to move that money! Even if you have to safe a few months you could get $1,000 and open an account with schwab or fidelity etc. And use an established broker with many low cost index funds.

How long has betterment been in business? Will they be here in 20 years? Are they even profitable? I sometimes worry about this for my money in schwab, it'd be even more concerned if I had $100k with some startup!

I know we all plan to have lower taxes in retirement, but it should be remembered that tax loss harvesting only defers taxes. It drives down your cost basis so if you do sell you'd have higher gains.

capital

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Re: Betterment for taxable holdings.
« Reply #29 on: January 21, 2015, 07:50:51 AM »
The truth is that the excess after-tax performance of tax-loss harvesting will stop helping you after a short period of time.
Please explain why.

I've posted lots of fun charts and excel sheets on this topic here:

http://forum.mrmoneymustache.com/investor-alley/betterment-$50k-'safety-net'/msg487131/#msg487131

Long story short, Tax Loss Harvesting has the opportunity for a good benefit the first year, but it doesn't always happen.  And unfortunately, after the first year (2-3 if you're "lucky" enough to have a 2008 crash), that same money never sees another dime in tax loss harvesting.  This has been the case for every single year that the ETFs in Betterment's portfolio have been around.  If you're investing with the expectation that your money will grow, you must also acknowledge that Tax Loss Harvesting on any one particular deposit will eventually not be possible (there will be no losses to harvest).  After a few years, the cost from the higher fee will negate the early benefit from TLH, and it's all downhill from there.

Said another way, why pay a higher percentage fee on your portfolio, each and every year, for the rest of your life...to save a few hundred bucks the first year?
I personally haven't had an easy time understanding your arguments, but I've read them carefully and think they come down to:
1. Tax loss harvesting is unlikely to be available to be available beyond a year or so on any new investment, because:
 a. the investment will relatively quickly go high above its basis, and
 b. it will not go below its basis even if it declines substantially (that being the point of making said investment).
2. Automated tax loss harvesting can provide advantages in the accumulation phase, but:
 a. if one intends to retire early, the accumulation phase should be short relative to drawdown, and
 b. there is no tax-efficient way to transfer a complex portfolio to a simpler portfolio with a low-fee provider.

Does that sound right?

A related question on tax efficiency: is there any tax-efficient way to move holdings from VFIFX (a Vanguard auto 4-fund portfolio, currently 90% stock 10% bond) to equivalent Admiral-class funds?

DrF

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Re: Betterment for taxable holdings.
« Reply #30 on: January 21, 2015, 08:17:34 AM »
Let's just follow the experiment in real time.

http://www.mrmoneymustache.com/betterment-vs-vanguard/

Eventually we will be able to confirm or disprove our assumptions.

pzxc

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Re: Betterment for taxable holdings.
« Reply #31 on: January 21, 2015, 09:19:49 AM »
Perhaps, but remember that due to tax reasons, as your wealth grows it become harder and harder to move your money. So think of choosing a broker as a marriage. After 10-20 years of gains it would be a huge pain to move that money!

Why would it be a huge pain?  Aren't you allowed 1 rollover each year?  Can't you do a direct rollover so it doesn't cause a taxable event?

Scandium

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Re: Betterment for taxable holdings.
« Reply #32 on: January 21, 2015, 09:36:37 AM »
Perhaps, but remember that due to tax reasons, as your wealth grows it become harder and harder to move your money. So think of choosing a broker as a marriage. After 10-20 years of gains it would be a huge pain to move that money!

Why would it be a huge pain?  Aren't you allowed 1 rollover each year?  Can't you do a direct rollover so it doesn't cause a taxable event?
If it's an IRA yes. I was thinking a taxable account. With a tax deferred account there is even less benefit to betterment. See even less reason to used them for that

Dodge

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Re: Betterment for taxable holdings.
« Reply #33 on: January 21, 2015, 09:49:11 AM »
The truth is that the excess after-tax performance of tax-loss harvesting will stop helping you after a short period of time.
Please explain why.

I've posted lots of fun charts and excel sheets on this topic here:

http://forum.mrmoneymustache.com/investor-alley/betterment-$50k-'safety-net'/msg487131/#msg487131

Long story short, Tax Loss Harvesting has the opportunity for a good benefit the first year, but it doesn't always happen.  And unfortunately, after the first year (2-3 if you're "lucky" enough to have a 2008 crash), that same money never sees another dime in tax loss harvesting.  This has been the case for every single year that the ETFs in Betterment's portfolio have been around.  If you're investing with the expectation that your money will grow, you must also acknowledge that Tax Loss Harvesting on any one particular deposit will eventually not be possible (there will be no losses to harvest).  After a few years, the cost from the higher fee will negate the early benefit from TLH, and it's all downhill from there.

Said another way, why pay a higher percentage fee on your portfolio, each and every year, for the rest of your life...to save a few hundred bucks the first year?
I personally haven't had an easy time understanding your arguments, but I've read them carefully and think they come down to:
1. Tax loss harvesting is unlikely to be available to be available beyond a year or so on any new investment, because:
 a. the investment will relatively quickly go high above its basis, and
 b. it will not go below its basis even if it declines substantially (that being the point of making said investment).
2. Automated tax loss harvesting can provide advantages in the accumulation phase, but:
 a. if one intends to retire early, the accumulation phase should be short relative to drawdown, and
 b. there is no tax-efficient way to transfer a complex portfolio to a simpler portfolio with a low-fee provider.

Does that sound right?

A related question on tax efficiency: is there any tax-efficient way to move holdings from VFIFX (a Vanguard auto 4-fund portfolio, currently 90% stock 10% bond) to equivalent Admiral-class funds?

Yes, that sounds exactly right.  But I'd add another point to #2.  Even if the accumulation phase is long, the fees still catch up to you.  It is inevitable, for the simple reason that the fees are both percentage based (so they get higher as your account grows), and forever (each and every year, for the rest of your life), while the tax loss harvesting benefit is temporary.

RapmasterD

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Re: Betterment for taxable holdings.
« Reply #34 on: January 21, 2015, 11:07:05 AM »
Okay, obviously I don't know "most of the wealthy tech people in silicon valley" and neither do you, because there are thousands and thousands of them and one person can't know them or even most.

If you were seriously asking though and not just being snarky, I meant *young* wealthy tech people, the startup crowd, ycombinator types, it is very popular with them.

Your original statement was vague, and you couldn't back it up with specifics. And you still provided no specifics in your response (e.g., "I meant *young" wealthy tech people, the startup crowd, ycombinator types. It is very popular with them."). Again...what is "young?" What is "wealthy?" What does "very popular with them" mean?

Cathy, on the other hand, provided some specifics in her response. Thank you Cathy.

P.S. I just looked at Wealthfront's fees (.25% for everything above 10K) and am absolutely flabbergasted. Those bearded hipsters slurping down their Philz are getting FLEECED! I want to become an investor in (i.e., not an account holder at) Wealthfront NOW. Hook me up, man!
« Last Edit: January 21, 2015, 11:32:15 AM by RapmasterD »

pzxc

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Re: Betterment for taxable holdings.
« Reply #35 on: January 21, 2015, 12:52:44 PM »
I provided specifics.  You even quoted the specifics I provided.  If "ycombinator" isn't specific I don't know what is.  Were you expecting individual names?

This thread is so hostile.

RapmasterD

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Re: Betterment for taxable holdings.
« Reply #36 on: January 21, 2015, 02:37:53 PM »
To reiterate, you made generalized statements that you simply can't back up. My previously quoted statements attributed to you were solely intended to highlight how vague and nonspecific THOSE statements were. You think that saying "many of the young, wealthy YCombinator types use Wealthfront" is specific or meaningful?

Your original statement: "Most of the wealthy tech people in Silicon Valley use Wealthfront" is clearly bogus. Wealthfront manages $1.5 billion in assets. That is a paltry sum of money...seriously! MAYBE in 10 years your statement will be more accurate...maybe. The reason I'm coming at you is that well meaning people not in tech who live in another region of the country, for example, may actually believe you.

And speaking of hostile, when you make statements like, " I think you rich mofos sometimes forget what it's like to be just getting started," you don't think that's hostile, incendiary, or offensive?

Oh I know...you were just kidding on that one, right? I didn't laugh.

FACT: You can open an account at Vanguard with a STAR fund with $1,000 -- less than the $5,000 minimum required for Wealthfront to manage your money. (Source: Vanguard. LINK: https://personal.vanguard.com/us/funds/snapshot?FundId=0056&FundIntExt=INT ' Source: https://www.wealthfront.com/who-we-are).

FACT: Average return of the STAR fund in the last 10 years was 7% -- for a 60% stock/40% bond portfolio. (Source: http://performance.morningstar.com/fund/performance-return.action?t=VGSTX&region=usa&culture=en-US).

DISCLAIMER: I do not invest in the Vanguard STAR Fund.
« Last Edit: January 21, 2015, 02:40:28 PM by RapmasterD »

pzxc

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Re: Betterment for taxable holdings.
« Reply #37 on: January 21, 2015, 03:23:29 PM »
Quote
Most of the wealthy tech people in silicon valley use Wealthfront (in preference to Betterment)

There is that better?

The comment was in response to someone saying, "I wish I had come up with Betterment. It's a great idea for the shareholders of Betterment. Asset management truly is a fantastic business."

All I meant to say was that Betterment is hardly original.

Yes, I should have said "many" instead of "most".  So sorry.

But you do kind of remind me of this guy:



So at least I got a laugh out of it. Thanks for that.

(In case you hadn't noticed, people make sweeping generalizations on the internet all the time.  If somebody says, "Most people around here use (x)", it takes a new level of pedantry to beat him down with "But do you know personally most people!!! How can you speak for them if you don't know most people!!!"

I can't imagine any other reason for being so aggressive with me other than trolling, though.  So I guess it's time to stop feeding.

/shrug

Honest Abe

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Re: Betterment for taxable holdings.
« Reply #38 on: January 21, 2015, 04:09:29 PM »
When I'm FIRE I'll come back here and make really long posts about Vanguard vs. Betterment vs. Wealthfront.

But I worked all day today so I'm gonna go make dinner!

RapmasterD

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Re: Betterment for taxable holdings.
« Reply #39 on: January 21, 2015, 04:32:35 PM »
Quote
Most of the wealthy tech people in silicon valley use Wealthfront (in preference to Betterment)

There is that better?

The comment was in response to someone saying, "I wish I had come up with Betterment. It's a great idea for the shareholders of Betterment. Asset management truly is a fantastic business."

All I meant to say was that Betterment is hardly original.

Yes, I should have said "many" instead of "most".  So sorry.

But you do kind of remind me of this guy:



So at least I got a laugh out of it. Thanks for that.

(In case you hadn't noticed, people make sweeping generalizations on the internet all the time.  If somebody says, "Most people around here use (x)", it takes a new level of pedantry to beat him down with "But do you know personally most people!!! How can you speak for them if you don't know most people!!!"

I can't imagine any other reason for being so aggressive with me other than trolling, though.  So I guess it's time to stop feeding.

/shrug

Dude!!! That one teeny little word addition makes a huge difference. And on that front, I 100% agree with you. Compared to Betterment, Wealthfront definitely has more share of mind in these parts -- I'm thinking of the many companies lining the SF Downtown Financial District within several blocks of the Embarcadero. Let's just say I witnessed a few HR-scheduled "brownbag lunches" on investing that were sponsored by Wealthfront in my day, with the promise of free "Pizza Orgasmica" to the first folks to show up. And they're headquarterd in Palo Alto. Do I hear/see much about Betterment except on MMM and pee covered billboard ads on the BART? Never. The fact that Wealthfront's CEO is a former VP of Product Management from LinkedIn means he is pretty wired in around here.

BTW, apologies if you thought I was trolling. I'm just striving for a bit more accuracy here, which you have now just provided. Yes, I know that people make sweeping generalizations on the Internet all the time. Perhaps I'm crazily naive, but I'd like to hope that on the MMM forum -- this safe harbor within the wild Internet, we really try and minimize how often we do that. Yeah, the cartoon is good.

P.S. I'm actually extremely intrigued by the direct indexing concept Wealthfront is pioneering. LINK: https://www.wealthfront.com/tax-optimized-direct-indexing
« Last Edit: January 21, 2015, 04:34:47 PM by RapmasterD »

4alpacas

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Re: Betterment for taxable holdings.
« Reply #40 on: January 21, 2015, 04:47:15 PM »
<<Most of the wealthy tech people in silicon valley use Wealthfront.>>

pzxc - What is the minimum liquid net worth barrier for being a "wealthy tech person?"

And specifically, how many Silicon Valley wealthy tech people do you know who use Wealthfront?

Because 90% of the wealthy tech people I know, probably about 30 people with a liquid net worth > $10 million, use financial advisers.

But perhaps your threshold is lower than $10 million. Here in Silicon Valley, mine is not. So....what is yours? And again, numbers of people you know who use Wealthfront?

P.S. You can shoot the messenger, but I didn't pull that 10 mil # out of my ass. LINK: http://www.nytimes.com/2007/08/05/technology/05rich.html?pagewanted=print
Thanks for the link. 

milesdividendmd

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Re: Betterment for taxable holdings.
« Reply #41 on: January 21, 2015, 04:59:56 PM »

>>Part of me finds these repetitive Betterment threads to be amusing, mostly due to snarky comments from folks like me.

>>Part of me thinks our famous Las Vegas-based forum moderator should write a brief sticky post at the top of THIS forum recommending what one should post about Betterment that is net new. Maybe this is not feasible, but man...it seems we cover the same ground on this one. And with that said....

...I think Betterment is a complete joke, designed for hipster software company middle managers with thick black glasses and annoying beards who listen to way too much Grizzly Bear, as well as aging MDs from Portland (oh come on Miles...just kidding). NEXT!

So much for New Years resolutions.

I guess will power and judgement are not the strong suits of hip hop wannabes.

innerscorecard

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Re: Betterment for taxable holdings.
« Reply #42 on: January 21, 2015, 07:05:09 PM »
I think that Betterment is a reasonable choice for people who are cognizant of the fact that they're paying for marginal convenience. What I object to is people fooling themselves that they're actually saving money with tax-loss harvesting.

RapmasterD

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Re: Betterment for taxable holdings.
« Reply #43 on: January 21, 2015, 09:18:31 PM »
inner -- Well stated.

Miles -- You don't know the half of it. Years ago I woke up my wife in the middle of the night because I was laughing crazily in my sleep. I had been dreaming that I was driving around Long Beach in a convertible with Snoop. We were getting high, yucking it up and having a good time. It was a ridiculous dream. But "Gin and Juice" is the penultimate cure for the common cold.

pzxc

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Re: Betterment for taxable holdings.
« Reply #44 on: January 22, 2015, 08:47:27 AM »
BTW, apologies if you thought I was trolling. I'm just striving for a bit more accuracy here

You have a very roundabout, passive-aggressive way of trying to get it.

You could have just said, "I know you don't mean that a *literal* majority of wealthy people in the valley use Wealthfront, and I am unable to elucidate an alternative interpretation, so what were you trying to say?"
(which would have made me realize I was being unclear)

Instead of trying to browbeat me with "Who is young? Who is wealthy? What does very popular mean? Why can't you be more specific? Ycombinator is not specific enough.  Stop writing generalization checks that your ass can't cash!!!!!!"  (yes that is hyperbolic but that is the gist of the tone I was getting from your interrogation)

I couldn't even figure out what your problem with me was; it was like being interrogated for a crime when I didn't even know what the charges were.
And frankly, I don't need this kind of negativity/hostility in my life.  Maybe there are better things I should be doing with my time.
Thanks for making me realize that, too.
See ya guys later -- good luck with your fortunes!

(Edit: Yes, I'm taking my ball and going home, and yes, I know how childish that is.  Nevertheless, the cost-benefit analysis of me using this site has just tipped the scales. Oh well, maybe our paths will cross again!  I really do mean it when I say good luck guys! I know life is not a zero-sum game so I wish all of you the best prosperity possible!)
« Last Edit: January 22, 2015, 08:50:38 AM by pzxc »

RapmasterD

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Re: Betterment for taxable holdings.
« Reply #45 on: January 22, 2015, 01:01:36 PM »
I'm actually aggressive-aggressive, but thanks anyway. Toodles.

el_beardo

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Re: Betterment for taxable holdings.
« Reply #46 on: February 09, 2015, 05:56:35 PM »
They're definitely fantastic marketers. Everyone repeats the line about tax-loss harvesting.

The truth is that the excess after-tax performance of tax-loss harvesting will stop helping you after a short period of time.

And you can do it yourself, too.

How do the benefits of tax-loss harvesting stop after a short period of time ?

Dodge

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Re: Betterment for taxable holdings.
« Reply #47 on: February 09, 2015, 06:15:45 PM »
They're definitely fantastic marketers. Everyone repeats the line about tax-loss harvesting.

The truth is that the excess after-tax performance of tax-loss harvesting will stop helping you after a short period of time.

And you can do it yourself, too.

How do the benefits of tax-loss harvesting stop after a short period of time ?

If you're investing with the expectation that your money will grow, you must also acknowledge that Tax Loss Harvesting on any one particular deposit will eventually not be possible (there will be no losses to harvest).

el_beardo

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Re: Betterment for taxable holdings.
« Reply #48 on: February 09, 2015, 06:21:05 PM »
They're definitely fantastic marketers. Everyone repeats the line about tax-loss harvesting.

The truth is that the excess after-tax performance of tax-loss harvesting will stop helping you after a short period of time.

And you can do it yourself, too.

How do the benefits of tax-loss harvesting stop after a short period of time ?

If you're investing with the expectation that your money will grow, you must also acknowledge that Tax Loss Harvesting on any one particular deposit will eventually not be possible (there will be no losses to harvest).

What about dividend re-investment or additional funds ? Won't my year 2 contributions also be eligible for tax-loss harvesting ?

tj

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Re: Betterment for taxable holdings.
« Reply #49 on: February 09, 2015, 06:21:11 PM »
They're definitely fantastic marketers. Everyone repeats the line about tax-loss harvesting.

The truth is that the excess after-tax performance of tax-loss harvesting will stop helping you after a short period of time.

And you can do it yourself, too.

I feel like this logic is true if you were to lump sum and then set and forget, but if you contribute annually (or monthly) in relatively equal amounts, the TLH should help you as long as you regularly contributing. Obviously once you are in the withdrawal phase, the strategy is less advantageous.