Author Topic: Betterment vs Vanguard II: Less name calling, more data.  (Read 18466 times)

milesdividendmd

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After the dust up a couple of weeks ago about Betterment, I thought it would be interesting to perform a little experiment.

[MOD EDIT: Link removed.  Please stop spamming links promoting your own site.  A single link in your signature is sufficient, and will be under every post you make.  Thanks.]

Take a look and let me know if you think the design is reasonable.  Suggestions, thoughts, and criticisms are more than welcome.  Just keep it classy!

Alexi
« Last Edit: May 20, 2014, 09:04:20 PM by arebelspy »

Jack

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Re: Betterment vs Vanguard II: Less name calling, more data.
« Reply #1 on: May 17, 2014, 06:13:58 AM »
My main criticism is that you're not making an apples-to-apples comparison: you need to use the same asset allocation in both accounts. I can't tell from the information given, but I suspect the Betterment portfolio is significantly less than 40% international.

foobar

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Re: Betterment vs Vanguard II: Less name calling, more data.
« Reply #2 on: May 17, 2014, 06:48:28 AM »
Last I checked you can buy vanguard funds in fractional shares.

What is the point of your experiment? You are not comparing vanguard to betterment. You are comparing one random selection of funds to another.  Over 30 years (time for full market cycles), I expect the betterment portfolio to outperform due to size and value tilts. However replace 10% of VTI with VBR to give vanguard about the same size tilt and I would expect vanguard to win.  VBR is much cheaper (.09 to .36% before adding in the betterment handicap).

In the end it comes down to do you want to pay 1000's of dollars to save a couple hours/yr. There is no right answer to that.


After the dust up a couple of weeks ago about Betterment, I thought it would be interesting to perform a little experiment.

http://www.milesdividendmd.com/a-little-experiment/

Take a look and let me know if you think the design is reasonable.  Suggestions, thoughts, and criticisms are more than welcome.  Just keep it classy!

Alexi

Cyrano

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Re: Betterment vs Vanguard II: Less name calling, more data.
« Reply #3 on: May 17, 2014, 07:02:11 AM »
With different asset allocations, over a short time frame like a few years it's going to come down to whichever AA outperformed.

Betterment tells us (or at least illustrates) what their AA is at 80/20 and which funds they are invested in to reach that AA. It would be straightforward enough to backtest this over the past 10 years, and that would
* Let you use the same asset allocation for each chunk of money
* Let you re-run the outcome for $1k, $10k, $100k without tying up $100k of your own money. (Any inefficiencies due to fractional shares are a constant regardless of the size of the stash, but expenses levied on assets grow proportionally with the stash. The $1000 size is really chosen to give Betterment the best chance possible, while the fees are more corrosive to a stash one could retire on.)

milesdividendmd

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Re: Betterment vs Vanguard II: Less name calling, more data.
« Reply #4 on: May 17, 2014, 09:35:05 AM »
Jack,

That is a valid criticism.

I will make the international slice 29% of the portfolio and the US equity portion  51% of the allocation to make the comparison apples to apples.

Thanks,

Alexi

milesdividendmd

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Re: Betterment vs Vanguard II: Less name calling, more data.
« Reply #5 on: May 17, 2014, 09:56:14 AM »
Foobar,

Please share with me where you can buy fractional shares of vanguard etfs for free. I am not wedded to using td ameritrade.

The purpose of this experiment is to evaluate the costs and benefits of a betterment account  to a simple lazy portfolio rebalanced once a year.

On the original thread my argument was that Betterment was a fairly priced and good investment product as was vanguard. My feeling is that betterment is a particularly reasonable approach for a beginning investor who doesn't want to deal with learning about investment principles or rebalancing.

I also think that the betterment portfolio is evidence based and may provide  additional returns to justify the cost of convenience.

The other side of the argument as I perceived it was that betterment provided nothing of value and just skimmed money while adding no value over a simple portfolio from vanguard. Some advocated for target date funds, others advocated for lazy portfolios.

No one advocated for multi asset class portfolios with small and value tilts, as this would be unrealistic for the beginning investor, who just wanted to set it and forget it.

If you are right about "what it comes down to" then the lazy portfolio will consistently outperform betterment by the exact difference in their expense ratios.

Maybe you're right.  Maybe you're not. Let's see.

Alexi

milesdividendmd

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Re: Betterment vs Vanguard II: Less name calling, more data.
« Reply #6 on: May 17, 2014, 10:00:47 AM »
Cyrano,

Back testing is always subject to the claim that the AA was cherry picked to optimize results.

That being said, I would be very interested in your proposed experiment. Please share the results with the group. We could all learn a lot.

Alexi

foobar

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Re: Betterment vs Vanguard II: Less name calling, more data.
« Reply #7 on: May 17, 2014, 07:23:32 PM »
I am pretty sure vanguard allows partial share purchase but I could be wrong. I looked into it several years ago. In general I tend to be a mutual fund guy rather than etfs unless the product isn't available in mutual fund form.

Backtesting is definitely has issues. That being said take a gander at: http://www.portfoliovisualizer.com/AnalyzePortfolio?s=y&symbol12=VGTSX&allocation7_1=5&symbol11=VBTLX&symbol13=VISVX&allocation1_1=17&symbol10=VEIEX&allocation5_1=15&allocation5_2=39&allocation5_3=30&allocation3_1=0&allocation13_3=9&allocation9_1=33&symbol9=VTMGX&symbol8=iwn&showYield=false&symbol4=vwob&symbol5=vti&symbol6=ive&symbol7=iws&allocation11_3=20&allocation11_2=20&symbol1=agg&annualOperation=0&symbol2=lqd&allocation4_1=0&endYear=2013&initialAmount=10000&allocation6_1=15&allocation2_1=3&allocation8_1=4&allocation10_1=8&annualAdjustment=0&startYear=1985&allocation12_2=41&allocation12_3=41

Portfolio 1 is about betterment with no managment fee
Portfolio 2 is a 3 fund vanguard
Portfolio 3 is 4 fund vanguard with the VBR replacing the mid/small value tilt by the same percentage

The issues.
1)I replaced a bunch of etfs with mutual funds to get a 9+ year history.
2) I replaced some of the betterment bonds (emerging market) with total because they had no history. 
3) Rebalancing is annually.
4) no betterment tax. That will reduce their results  by .2%+ or so.
5) I have no clue if betterment dynamically alters there AA over the years
6) The higher fees that vanguard faces (using investor class for total international and value) are higher than the ones faced by betterment (investor for  emerging markets)
7) taxes ignored.

Don't look at these and say one outperforms the other. The back testing isn't that accurate.  Not to mention it is only 1 9 year period.  The take away to me is that if you pick a remotely similar portfolio (stock/bond ratio, us vs international, small tilt) you are getting very similar results. You are not getting better results with betterment. There is a reason why they post their results against active fund managers (whose 1-2% fees really drag down performance) rather than people using similar index funds. You are paying for connivence. Nothing wrong with that. 


Cyrano,

Back testing is always subject to the claim that the AA was cherry picked to optimize results.

That being said, I would be very interested in your proposed experiment. Please share the results with the group. We could all learn a lot.

Alexi

Joel

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Re: Betterment vs Vanguard II: Less name calling, more data.
« Reply #8 on: May 17, 2014, 08:08:39 PM »
They are using vanguard funds with higher fees. There is nothing to test. If you own the same exact funds with lower fees you will be better off.

All you are doing with betterment is paying someone else to manage your asset allocation after you determine what it should be (potentially using their advice to choose).

The answer is simple. If you feel the value added to manage your asset allocation is worth it, then pay it. When you are ready to save some money, do the research and do it yourself with vanguard.

milesdividendmd

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Re: Betterment vs Vanguard II: Less name calling, more data.
« Reply #9 on: May 18, 2014, 12:02:28 AM »
Foobar,

Thanks for generating and posting this back test. 

I agree that this doesn't really prove anything one way or another. 

The chief difference between Betterment and a simple vanguard portfolio, and a betterment portfolio are

1.  Higher fees with betterment
2.  Automatic continuous rebalancing with betterment.
3.  A more complex portfolio with a small value tilt with Betterment.

Your back test doesn't address the first 2 issues, but does suggest that there is some merit to the Betterment portfolio (higher CAGR, lower Standard deviation, higher Sharpe ratio,)  though I doubt these are significant differences.

I think that the prospective test will better get at these issues.  Do you agree?

Alexi

foobar

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Re: Betterment vs Vanguard II: Less name calling, more data.
« Reply #10 on: May 18, 2014, 08:29:35 AM »
Vanguard portfolios can be as complex as you want. Those numbers are not remotely accurate (not to mention short term) to say that any of those portfolios are better or worse. The take away is you have to work hard to get another .2% return which is why a lot of people focus on ER and management fees.



[white author=milesdividendmd link=topic=18054.msg294896#msg294896 date=1400392948]
Foobar,

Thanks for generating and posting this back test. 

I agree that this doesn't really prove anything one way or another. 

The chief difference between Betterment and a simple vanguard portfolio, and a betterment portfolio are

1.  Higher fees with betterment
2.  Automatic continuous rebalancing with betterment.
3.  A more complex portfolio with a small value tilt with Betterment.

Your back test doesn't address the first 2 issues, but does suggest that there is some merit to the Betterment portfolio (higher CAGR, lower Standard deviation, higher Sharpe ratio,)  though I doubt these are significant differences.

I think that the prospective test will better get at these issues.  Do you agree?

Alexi
[/quote]

arebelspy

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Re: Betterment vs Vanguard II: Less name calling, more data.
« Reply #11 on: May 18, 2014, 08:39:29 AM »
They are using vanguard funds with higher fees. There is nothing to test. If you own the same exact funds with lower fees you will be better off.

All you are doing with betterment is paying someone else to manage your asset allocation after you determine what it should be (potentially using their advice to choose).

The answer is simple. If you feel the value added to manage your asset allocation is worth it, then pay it. When you are ready to save some money, do the research and do it yourself with vanguard.

Agree with this while post, but especially the first two sentences.

Bettermint WILL cost you money and underperform.  It frankly will.

But it will also save you between 10 minutes and two hours each year.

If you want them to do it for you, fine.  But realize that you're paying for the convenience and stop trying to trick yourself that you'll come out ahead.
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
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milesdividendmd

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Re: Betterment vs Vanguard II: Less name calling, more data.
« Reply #12 on: May 18, 2014, 11:17:59 AM »
Arabelespy,

If you object to my choice of funds, why not suggest an alternate choice of funds?  Tough to find a fund cheaper than VTI.

Instead of making predictions in full caps, about what WILL happen, why don't you come up with your own portfolio and invest $1000 in it and rebalance it once a year. We can start June 1 if you like.

Your analysis conveniently ignores the unique features of betterments approach, namely the purchase of fractional shares of ETFs, and continuous rebalancing.

Whether or not these features will deliver returns greater than the Delta in the expense ratios is unknown, which is precisely why I have proposed this experiment.

Alexi



They are using vanguard funds with higher fees. There is nothing to test. If you own the same exact funds with lower fees you will be better off.

All you are doing with betterment is paying someone else to manage your asset allocation after you determine what it should be (potentially using their advice to choose).

The answer is simple. If you feel the value added to manage your asset allocation is worth it, then pay it. When you are ready to save some money, do the research and do it yourself with vanguard.

Agree with this while post, but especially the first two sentences.

Bettermint WILL cost you money and underperform.  It frankly will.

But it will also save you between 10 minutes and two hours each year.

If you want them to do it for you, fine.  But realize that you're paying for the convenience and stop trying to trick yourself that you'll come out ahead.

Joel

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Re: Betterment vs Vanguard II: Less name calling, more data.
« Reply #13 on: May 18, 2014, 11:21:38 AM »
Since when can you not buy partial shares from vanguard? Last I checked I bought partial shares of the VTSAX...

The only difference is the frequency of the rebalancing...

arebelspy

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Re: Betterment vs Vanguard II: Less name calling, more data.
« Reply #14 on: May 18, 2014, 11:24:07 AM »
Arabelespy,

If you object to my choice of funds, why not suggest an alternate choice of funds?

I didn't object to your choice of funds.  Where did you get that in what I said?

I objected to your choice of bettermint as a way to make MORE money.

You are paying them to buy vanguard funds for you. If you want that convenience, time saving, whatever, fine.  There are reasons to use bettermint.  Making more money isn't one of them, as you have to pay their fees on top of the fund fees. Obviously DIY is cheaper, therefore you end up with more money.

If you want them to do it for you, fine.  But realize that you're paying for the convenience and stop trying to trick yourself that you'll come out ahead.
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

aj_yooper

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Re: Betterment vs Vanguard II: Less name calling, more data.
« Reply #15 on: May 18, 2014, 11:29:57 AM »
They are using vanguard funds with higher fees. There is nothing to test. If you own the same exact funds with lower fees you will be better off.


Yes, experiment concluded.

milesdividendmd

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Re: Betterment vs Vanguard II: Less name calling, more data.
« Reply #16 on: May 18, 2014, 11:33:28 AM »
Foobar,

While it is true that you can make a Vanguard portfolio as complex as you want, I designed the experiment in this way based on the prior thread, where the claim was repeatedly made that the Betterment portfolio would not outperform a simple three or four fund Vanguard portfolio.

Furthermore, the only claim that I really made in the prior thread was that Betterment was a good value for a novice hands off investor. It's not realistic for such an investor to design and rebalance a 15 fund slice and dice portfolio IMHO.

Other than that small Point, it seems to me that we are making the exact same point about your back test results, with different emphasis.

Alexi.

Vanguard portfolios can be as complex as you want. Those numbers are not remotely accurate (not to mention short term) to say that any of those portfolios are better or worse. The take away is you have to work hard to get another .2% return which is why a lot of people focus on ER and management fees.



[white author=milesdividendmd link=topic=18054.msg294896#msg294896 date=1400392948]
Foobar,

Thanks for generating and posting this back test. 

I agree that this doesn't really prove anything one way or another. 

The chief difference between Betterment and a simple vanguard portfolio, and a betterment portfolio are

1.  Higher fees with betterment
2.  Automatic continuous rebalancing with betterment.
3.  A more complex portfolio with a small value tilt with Betterment.

Your back test doesn't address the first 2 issues, but does suggest that there is some merit to the Betterment portfolio (higher CAGR, lower Standard deviation, higher Sharpe ratio,)  though I doubt these are significant differences.

I think that the prospective test will better get at these issues.  Do you agree?

Alexi
[/quote]

foobar

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Re: Betterment vs Vanguard II: Less name calling, more data.
« Reply #17 on: May 18, 2014, 02:18:35 PM »
Go back to my link. The performance between betterment and a 4 fund portfolio is about 0. Throw in a .2% betterment AUM fee and they lose.

But frankly even if you wanted to maintain some 20 fund portfolio, it isn't much work. Once a month, you update the values in your spread sheet and it tells you where to put new money. It isn't rocket science. It is an hour a month max. It also isn't rocket science to come up with a portfolio. There are 8 zillion out there from well respected names. Heck use betterments if you like it. And pretty much all of them will give you similar results over 30 year periods.

I don't want to sound antibetterment (or wealthfront, or any of the zillion other companies doing this...). If you have no interest in investing, they are a much better option than signing up with some advisor that is going to charge you 1% and stick you in some american funds with expense ratios of 1.5%.  There is some risk with these companies that they modify the portfolio to chase performance (i.e. need to look good in review. If wealthfronts allocation returns 9% and betterment returns 8%, who do you think is going to win the marketing battle. You might not want an overweighting of a poor performing sector showing up in your model portfolio) but in general their portfolios are fundamentally sound and will give you decent returns.

At the end of the day it comes down to do you want to spend 10 hours/yr to save .2%.  That is a personal choice.

If you really want to outperform the market, you have to deviate more from the market profile. Stick 40% of your money in emerging markets and you have a great change to outperform over the next 20 years. It will also be a wild ride and your chances of underperforming are also great.

Foobar,

While it is true that you can make a Vanguard portfolio as complex as you want, I designed the experiment in this way based on the prior thread, where the claim was repeatedly made that the Betterment portfolio would not outperform a simple three or four fund Vanguard portfolio.

Furthermore, the only claim that I really made in the prior thread was that Betterment was a good value for a novice hands off investor. It's not realistic for such an investor to design and rebalance a 15 fund slice and dice portfolio IMHO.

Other than that small Point, it seems to me that we are making the exact same point about your back test results, with different emphasis.

Alexi.

Vanguard portfolios can be as complex as you want. Those numbers are not remotely accurate (not to mention short term) to say that any of those portfolios are better or worse. The take away is you have to work hard to get another .2% return which is why a lot of people focus on ER and management fees.



[white author=milesdividendmd link=topic=18054.msg294896#msg294896 date=1400392948]
Foobar,

Thanks for generating and posting this back test. 

I agree that this doesn't really prove anything one way or another. 

The chief difference between Betterment and a simple vanguard portfolio, and a betterment portfolio are

1.  Higher fees with betterment
2.  Automatic continuous rebalancing with betterment.
3.  A more complex portfolio with a small value tilt with Betterment.

Your back test doesn't address the first 2 issues, but does suggest that there is some merit to the Betterment portfolio (higher CAGR, lower Standard deviation, higher Sharpe ratio,)  though I doubt these are significant differences.

I think that the prospective test will better get at these issues.  Do you agree?

Alexi
[/quote]

milesdividendmd

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Re: Betterment vs Vanguard II: Less name calling, more data.
« Reply #18 on: May 18, 2014, 02:21:32 PM »
Arabelspy,

It seems we interpreted the "they" differently in Joel's post. This pronoun was confusing since it could either mean me or Betterment, (and I am not plural, but betterment includes non vanguard funds in their portfolio.)

I, of course, never advocated for Betterment as a way to make "more money,"though I did leave open the possibility that it could outperform a lazy portfolio even after fees in some circumstances (which you seem to think is an impossibility. )

We'll see.

Alexi



Arabelespy,

If you object to my choice of funds, why not suggest an alternate choice of funds?

I didn't object to your choice of funds.  Where did you get that in what I said?

I objected to your choice of bettermint as a way to make MORE money.

You are paying them to buy vanguard funds for you. If you want that convenience, time saving, whatever, fine.  There are reasons to use bettermint.  Making more money isn't one of them, as you have to pay their fees on top of the fund fees. Obviously DIY is cheaper, therefore you end up with more money.

If you want them to do it for you, fine.  But realize that you're paying for the convenience and stop trying to trick yourself that you'll come out ahead.

milesdividendmd

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Re: Betterment vs Vanguard II: Less name calling, more data.
« Reply #19 on: May 18, 2014, 03:10:29 PM »
Foobar,

No need to go back and look at your link. The four fund portfolio was outperformed by the betterment portfolio by 12 basis points in CAGR.

I think 12 basis points matters in both fees and returns in that The only thing that really matters in the end is how much money ends up your pocket. And the back test of course doesn't get at the difference between continual rebalancing versus once a year rebalancing, or the ability to buy fractional shares or Betterments fees. (as was already discussed.)

While I agree it would not be very difficult for you or me to manage a 20 fund portfolio with monthly rebalancing, that is not really the question. We are both investing nerds. For someone like my mother, on the other hand, it is out of the question. Betterment is perfect for her and represents a great value at a fair price.

In reading your last paragraph, it seems that there is very little difference in our opinion about the merits of Betterment. Just as you don't wish to be seen as "anti-Betterment" I do not wish to be seen as a Betterment homer. I think it is one of many good products. And I am living proof that someone can be both pro Vanguard and pro Betterment.

-Alexi

Go back to my link. The performance between betterment and a 4 fund portfolio is about 0. Throw in a .2% betterment AUM fee and they lose.

But frankly even if you wanted to maintain some 20 fund portfolio, it isn't much work. Once a month, you update the values in your spread sheet and it tells you where to put new money. It isn't rocket science. It is an hour a month max. It also isn't rocket science to come up with a portfolio. There are 8 zillion out there from well respected names. Heck use betterments if you like it. And pretty much all of them will give you similar results over 30 year periods.

I don't want to sound antibetterment (or wealthfront, or any of the zillion other companies doing this...). If you have no interest in investing, they are a much better option than signing up with some advisor that is going to charge you 1% and stick you in some american funds with expense ratios of 1.5%.  There is some risk with these companies that they modify the portfolio to chase performance (i.e. need to look good in review. If wealthfronts allocation returns 9% and betterment returns 8%, who do you think is going to win the marketing battle. You might not want an overweighting of a poor performing sector showing up in your model portfolio) but in general their portfolios are fundamentally sound and will give you decent returns.

At the end of the day it comes down to do you want to spend 10 hours/yr to save .2%.  That is a personal choice.

If you really want to outperform the market, you have to deviate more from the market profile. Stick 40% of your money in emerging markets and you have a great change to outperform over the next 20 years. It will also be a wild ride and your chances of underperforming are also great.

Foobar,

While it is true that you can make a Vanguard portfolio as complex as you want, I designed the experiment in this way based on the prior thread, where the claim was repeatedly made that the Betterment portfolio would not outperform a simple three or four fund Vanguard portfolio.

Furthermore, the only claim that I really made in the prior thread was that Betterment was a good value for a novice hands off investor. It's not realistic for such an investor to design and rebalance a 15 fund slice and dice portfolio IMHO.

Other than that small Point, it seems to me that we are making the exact same point about your back test results, with different emphasis.

Alexi.

Vanguard portfolios can be as complex as you want. Those numbers are not remotely accurate (not to mention short term) to say that any of those portfolios are better or worse. The take away is you have to work hard to get another .2% return which is why a lot of people focus on ER and management fees.



[white author=milesdividendmd link=topic=18054.msg294896#msg294896 date=1400392948]
Foobar,

Thanks for generating and posting this back test. 

I agree that this doesn't really prove anything one way or another. 

The chief difference between Betterment and a simple vanguard portfolio, and a betterment portfolio are

1.  Higher fees with betterment
2.  Automatic continuous rebalancing with betterment.
3.  A more complex portfolio with a small value tilt with Betterment.

Your back test doesn't address the first 2 issues, but does suggest that there is some merit to the Betterment portfolio (higher CAGR, lower Standard deviation, higher Sharpe ratio,)  though I doubt these are significant differences.

I think that the prospective test will better get at these issues.  Do you agree?

Alexi
[/quote]

foobar

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Re: Betterment vs Vanguard II: Less name calling, more data.
« Reply #20 on: May 18, 2014, 06:39:36 PM »
Your reading in a level of accuracy which is well beyond what the data can provide.  For a dumb example compare 5 year returns. You end up with CAGRs of 11.31% vs 11.54% versus 11.77. You will be paying your money to underperform.:) Data like this is very dependant on picking the start and end date.

 For even fun imagine we are adding in 10k/yr. http://www.portfoliovisualizer.com/AnalyzePortfolio?s=y&symbol12=VGTSX&allocation7_1=5&symbol11=VBTLX&symbol13=VISVX&allocation1_1=17&symbol10=VEIEX&allocation5_1=15&allocation5_2=39&allocation5_3=30&allocation3_1=0&allocation13_3=9&allocation9_1=33&symbol9=VTMGX&symbol8=iwn&showYield=false&symbol4=vwob&symbol5=vti&symbol6=ive&symbol7=iws&allocation11_3=20&allocation11_2=20&symbol1=agg&annualOperation=1&symbol2=lqd&allocation4_1=0&endYear=2013&initialAmount=10000&allocation6_1=15&allocation2_1=3&allocation8_1=4&allocation10_1=8&annualAdjustment=10000&startYear=2003&allocation12_2=41&allocation12_3=41

.01% difference over all those years.  The point again isn't that vanguard is better or worse. It is if you pick the same asset allocation you are going to get the same results minus fees.


If you want to outperform you can not do light tilts. You need to do something like

http://www.portfoliovisualizer.com/AnalyzePortfolio?s=y&symbol12=VGTSX&allocation7_1=5&symbol11=VBTLX&symbol13=VISVX&allocation1_1=17&symbol10=VEIEX&allocation5_1=15&allocation5_2=39&allocation5_3=0&allocation3_1=0&allocation13_3=40&allocation9_1=33&symbol9=VTMGX&symbol8=iwn&showYield=false&symbol4=vwob&symbol5=vti&symbol6=ive&symbol7=iws&allocation11_3=20&allocation11_2=20&symbol1=agg&annualOperation=0&symbol2=lqd&allocation4_1=0&endYear=2013&initialAmount=10000&allocation6_1=15&allocation2_1=3&allocation8_1=4&allocation10_3=40&allocation10_1=8&annualAdjustment=0&startYear=2003&allocation12_2=41&allocation12_3=0

I know the theory behind doing it. I am not crazy enough to try it.

And I know some people go what does .2 or so loss of return matter. It is a small number. But run firecalc sometime and see what .20 does over you 20 years of accumulating and 40 years of spending.

Foobar,

No need to go back and look at your link. The four fund portfolio was outperformed by the betterment portfolio by 12 basis points in CAGR.

I think 12 basis points matters in both fees and returns in that The only thing that really matters in the end is how much money ends up your pocket. And the back test of course doesn't get at the difference between continual rebalancing versus once a year rebalancing, or the ability to buy fractional shares or Betterments fees. (as was already discussed.)

While I agree it would not be very difficult for you or me to manage a 20 fund portfolio with monthly rebalancing, that is not really the question. We are both investing nerds. For someone like my mother, on the other hand, it is out of the question. Betterment is perfect for her and represents a great value at a fair price.

In reading your last paragraph, it seems that there is very little difference in our opinion about the merits of Betterment. Just as you don't wish to be seen as "anti-Betterment" I do not wish to be seen as a Betterment homer. I think it is one of many good products. And I am living proof that someone can be both pro Vanguard and pro Betterment.

-Alexi

Go back to my link. The performance between betterment and a 4 fund portfolio is about 0. Throw in a .2% betterment AUM fee and they lose.

But frankly even if you wanted to maintain some 20 fund portfolio, it isn't much work. Once a month, you update the values in your spread sheet and it tells you where to put new money. It isn't rocket science. It is an hour a month max. It also isn't rocket science to come up with a portfolio. There are 8 zillion out there from well respected names. Heck use betterments if you like it. And pretty much all of them will give you similar results over 30 year periods.

I don't want to sound antibetterment (or wealthfront, or any of the zillion other companies doing this...). If you have no interest in investing, they are a much better option than signing up with some advisor that is going to charge you 1% and stick you in some american funds with expense ratios of 1.5%.  There is some risk with these companies that they modify the portfolio to chase performance (i.e. need to look good in review. If wealthfronts allocation returns 9% and betterment returns 8%, who do you think is going to win the marketing battle. You might not want an overweighting of a poor performing sector showing up in your model portfolio) but in general their portfolios are fundamentally sound and will give you decent returns.

At the end of the day it comes down to do you want to spend 10 hours/yr to save .2%.  That is a personal choice.

If you really want to outperform the market, you have to deviate more from the market profile. Stick 40% of your money in emerging markets and you have a great change to outperform over the next 20 years. It will also be a wild ride and your chances of underperforming are also great.

Foobar,

While it is true that you can make a Vanguard portfolio as complex as you want, I designed the experiment in this way based on the prior thread, where the claim was repeatedly made that the Betterment portfolio would not outperform a simple three or four fund Vanguard portfolio.

Furthermore, the only claim that I really made in the prior thread was that Betterment was a good value for a novice hands off investor. It's not realistic for such an investor to design and rebalance a 15 fund slice and dice portfolio IMHO.

Other than that small Point, it seems to me that we are making the exact same point about your back test results, with different emphasis.

Alexi.

Vanguard portfolios can be as complex as you want. Those numbers are not remotely accurate (not to mention short term) to say that any of those portfolios are better or worse. The take away is you have to work hard to get another .2% return which is why a lot of people focus on ER and management fees.



[white author=milesdividendmd link=topic=18054.msg294896#msg294896 date=1400392948]
Foobar,

Thanks for generating and posting this back test. 

I agree that this doesn't really prove anything one way or another. 

The chief difference between Betterment and a simple vanguard portfolio, and a betterment portfolio are

1.  Higher fees with betterment
2.  Automatic continuous rebalancing with betterment.
3.  A more complex portfolio with a small value tilt with Betterment.

Your back test doesn't address the first 2 issues, but does suggest that there is some merit to the Betterment portfolio (higher CAGR, lower Standard deviation, higher Sharpe ratio,)  though I doubt these are significant differences.

I think that the prospective test will better get at these issues.  Do you agree?

Alexi
[/quote]

milesdividendmd

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Re: Betterment vs Vanguard II: Less name calling, more data.
« Reply #21 on: May 18, 2014, 07:30:15 PM »
Foobar,

I agree that your backtest proves nothing.

It proves neither that Betterment will consistently outperform a simple or tilted 4 fund portfolio by 12 basis points nor that it won't.

It also doesn't prove that betterment will underperform a lazy Vanguard portfolio by the exact delta in their expense ratios.  If this were known then of course the vanguard lazy portfolio approach would vastly outperform the betterment over the long haul.

We're kind of going around in circles here. 

If you want to design a yearly rebalanced portfolio to get in on the fun please do so.  The more the merrier.  Let's get our portfolios in the market on June first.

I am not naive enough to think that this simple experiment will definatively answer the question as to which approach has more merit.  But I think it will provide a more interesting result than simply going back and forth making baseless claims about what will happen, when none of us have Crystal balls.  (Not that you are guilty of this Foobar.)

Alexi


Your reading in a level of accuracy which is well beyond what the data can provide.  For a dumb example compare 5 year returns. You end up with CAGRs of 11.31% vs 11.54% versus 11.77. You will be paying your money to underperform.:) Data like this is very dependant on picking the start and end date.

 For even fun imagine we are adding in 10k/yr. http://www.portfoliovisualizer.com/AnalyzePortfolio?s=y&symbol12=VGTSX&allocation7_1=5&symbol11=VBTLX&symbol13=VISVX&allocation1_1=17&symbol10=VEIEX&allocation5_1=15&allocation5_2=39&allocation5_3=30&allocation3_1=0&allocation13_3=9&allocation9_1=33&symbol9=VTMGX&symbol8=iwn&showYield=false&symbol4=vwob&symbol5=vti&symbol6=ive&symbol7=iws&allocation11_3=20&allocation11_2=20&symbol1=agg&annualOperation=1&symbol2=lqd&allocation4_1=0&endYear=2013&initialAmount=10000&allocation6_1=15&allocation2_1=3&allocation8_1=4&allocation10_1=8&annualAdjustment=10000&startYear=2003&allocation12_2=41&allocation12_3=41

.01% difference over all those years.  The point again isn't that vanguard is better or worse. It is if you pick the same asset allocation you are going to get the same results minus fees.


If you want to outperform you can not do light tilts. You need to do something like

http://www.portfoliovisualizer.com/AnalyzePortfolio?s=y&symbol12=VGTSX&allocation7_1=5&symbol11=VBTLX&symbol13=VISVX&allocation1_1=17&symbol10=VEIEX&allocation5_1=15&allocation5_2=39&allocation5_3=0&allocation3_1=0&allocation13_3=40&allocation9_1=33&symbol9=VTMGX&symbol8=iwn&showYield=false&symbol4=vwob&symbol5=vti&symbol6=ive&symbol7=iws&allocation11_3=20&allocation11_2=20&symbol1=agg&annualOperation=0&symbol2=lqd&allocation4_1=0&endYear=2013&initialAmount=10000&allocation6_1=15&allocation2_1=3&allocation8_1=4&allocation10_3=40&allocation10_1=8&annualAdjustment=0&startYear=2003&allocation12_2=41&allocation12_3=0

I know the theory behind doing it. I am not crazy enough to try it.

And I know some people go what does .2 or so loss of return matter. It is a small number. But run firecalc sometime and see what .20 does over you 20 years of accumulating and 40 years of spending.

Foobar,

No need to go back and look at your link. The four fund portfolio was outperformed by the betterment portfolio by 12 basis points in CAGR.

I think 12 basis points matters in both fees and returns in that The only thing that really matters in the end is how much money ends up your pocket. And the back test of course doesn't get at the difference between continual rebalancing versus once a year rebalancing, or the ability to buy fractional shares or Betterments fees. (as was already discussed.)

While I agree it would not be very difficult for you or me to manage a 20 fund portfolio with monthly rebalancing, that is not really the question. We are both investing nerds. For someone like my mother, on the other hand, it is out of the question. Betterment is perfect for her and represents a great value at a fair price.

In reading your last paragraph, it seems that there is very little difference in our opinion about the merits of Betterment. Just as you don't wish to be seen as "anti-Betterment" I do not wish to be seen as a Betterment homer. I think it is one of many good products. And I am living proof that someone can be both pro Vanguard and pro Betterment.

-Alexi

Go back to my link. The performance between betterment and a 4 fund portfolio is about 0. Throw in a .2% betterment AUM fee and they lose.

But frankly even if you wanted to maintain some 20 fund portfolio, it isn't much work. Once a month, you update the values in your spread sheet and it tells you where to put new money. It isn't rocket science. It is an hour a month max. It also isn't rocket science to come up with a portfolio. There are 8 zillion out there from well respected names. Heck use betterments if you like it. And pretty much all of them will give you similar results over 30 year periods.

I don't want to sound antibetterment (or wealthfront, or any of the zillion other companies doing this...). If you have no interest in investing, they are a much better option than signing up with some advisor that is going to charge you 1% and stick you in some american funds with expense ratios of 1.5%.  There is some risk with these companies that they modify the portfolio to chase performance (i.e. need to look good in review. If wealthfronts allocation returns 9% and betterment returns 8%, who do you think is going to win the marketing battle. You might not want an overweighting of a poor performing sector showing up in your model portfolio) but in general their portfolios are fundamentally sound and will give you decent returns.

At the end of the day it comes down to do you want to spend 10 hours/yr to save .2%.  That is a personal choice.

If you really want to outperform the market, you have to deviate more from the market profile. Stick 40% of your money in emerging markets and you have a great change to outperform over the next 20 years. It will also be a wild ride and your chances of underperforming are also great.

Foobar,

While it is true that you can make a Vanguard portfolio as complex as you want, I designed the experiment in this way based on the prior thread, where the claim was repeatedly made that the Betterment portfolio would not outperform a simple three or four fund Vanguard portfolio.

Furthermore, the only claim that I really made in the prior thread was that Betterment was a good value for a novice hands off investor. It's not realistic for such an investor to design and rebalance a 15 fund slice and dice portfolio IMHO.

Other than that small Point, it seems to me that we are making the exact same point about your back test results, with different emphasis.

Alexi.

Vanguard portfolios can be as complex as you want. Those numbers are not remotely accurate (not to mention short term) to say that any of those portfolios are better or worse. The take away is you have to work hard to get another .2% return which is why a lot of people focus on ER and management fees.



[white author=milesdividendmd link=topic=18054.msg294896#msg294896 date=1400392948]
Foobar,

Thanks for generating and posting this back test. 

I agree that this doesn't really prove anything one way or another. 

The chief difference between Betterment and a simple vanguard portfolio, and a betterment portfolio are

1.  Higher fees with betterment
2.  Automatic continuous rebalancing with betterment.
3.  A more complex portfolio with a small value tilt with Betterment.

Your back test doesn't address the first 2 issues, but does suggest that there is some merit to the Betterment portfolio (higher CAGR, lower Standard deviation, higher Sharpe ratio,)  though I doubt these are significant differences.

I think that the prospective test will better get at these issues.  Do you agree?

Alexi
[/quote]

innerscorecard

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Re: Betterment vs Vanguard II: Less name calling, more data.
« Reply #22 on: May 18, 2014, 08:09:00 PM »
I'm sympathetic to Betterment as a way to attain good results for most people over what they would attain without such an easy platform - I think a lot of those here on this forum are so good at DIY for every aspect of life they forget how lazy most people are. If most people can't even remember to pay their credit card or cable bills on time, how can they remember to rebalance?

On the other hand, for those who are mustachians, Vanguard is clearly the better choice.

fmzip

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Re: Betterment vs Vanguard II: Less name calling, more data.
« Reply #23 on: May 18, 2014, 08:27:53 PM »
I'm sympathetic to Betterment as a way to attain good results for most people over what they would attain without such an easy platform - I think a lot of those here on this forum are so good at DIY for every aspect of life they forget how lazy most people are. If most people can't even remember to pay their credit card or cable bills on time, how can they remember to rebalance?

On the other hand, for those who are mustachians, Vanguard is clearly the better choice.

Well said! I think that is exactly what most people miss, not everyone is a DIY'r in the financial spectrum of investing

thepokercab

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Re: Betterment vs Vanguard II: Less name calling, more data.
« Reply #24 on: May 18, 2014, 08:56:11 PM »
I'm sympathetic to Betterment as a way to attain good results for most people over what they would attain without such an easy platform - I think a lot of those here on this forum are so good at DIY for every aspect of life they forget how lazy most people are. If most people can't even remember to pay their credit card or cable bills on time, how can they remember to rebalance?

On the other hand, for those who are mustachians, Vanguard is clearly the better choice.

This.  I think we all agree that Betterment has a nice platform, and is no doubt a good product for lazy and/or unexperienced investors who are willing to pay a premium to have someone manage their investments.

But its probably not that optimal for people, like Mustachians, who are willing/able to manage their own portfolios with low fee options.  For myself, I'm fine spending a few hours per year on Vanguard, and don't see a need to pay some additional fees to do that few hours of work. 

It's like going to home-cooking forum and insisting on how great a certain restaurant is.  Sure, might be a nice restaurant, with good menu options, but most people on that forum are probably just interested in cooking it themselves. 

foobar

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Re: Betterment vs Vanguard II: Less name calling, more data.
« Reply #25 on: May 18, 2014, 09:19:36 PM »
It definitely isn't proof but it suggest that if you run this experiment long enough (i.e. 20-30 years), you will probably get similar results. If you run it like 5 years, you are measuring noise.  Overweight emerging a bit and they go in the tank for a decade, your not happy. Opposite happens and your a winner.

The argument really has nothing to do with portfolio performance. You can get that anywhere and there will always be someone with a secret sauce that has performed well over the past 10 years. When you look at betterment you either go
a) They do all that for only 3k per year
or
b) Thats all they do for 3k per year

The people in a think they are getting a deal. The people in B see a rip off.




Foobar,

I agree that your backtest proves nothing.

It proves neither that Betterment will consistently outperform a simple or tilted 4 fund portfolio by 12 basis points nor that it won't.

It also doesn't prove that betterment will underperform a lazy Vanguard portfolio by the exact delta in their expense ratios.  If this were known then of course the vanguard lazy portfolio approach would vastly outperform the betterment over the long haul.

We're kind of going around in circles here. 

If you want to design a yearly rebalanced portfolio to get in on the fun please do so.  The more the merrier.  Let's get our portfolios in the market on June first.

I am not naive enough to think that this simple experiment will definatively answer the question as to which approach has more merit.  But I think it will provide a more interesting result than simply going back and forth making baseless claims about what will happen, when none of us have Crystal balls.  (Not that you are guilty of this Foobar.)

Alexi


milesdividendmd

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Re: Betterment vs Vanguard II: Less name calling, more data.
« Reply #26 on: May 18, 2014, 11:20:17 PM »
Foobar,

Just to define terms if you are talking about a .25% expense ratio costing you $3000 you are talking about a portfolio size of $1,200,000, at which point your expense ratio with Betterment would be 0.15% meaning you would have to have a portfolio of $2,000,000 to pay $3000 in expenses.

I personally wouldn't want more than 250,000 in any one brokerage account in order to stay under SIPC insurance limits.

Alexi


foobar

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Re: Betterment vs Vanguard II: Less name calling, more data.
« Reply #27 on: May 19, 2014, 07:09:47 AM »
Yes i am talking 2+ million. That is what I need to generate my 60k.  YMMV. And that number only goes up every year.

SPIC insurance is 500k on stocks. But you should be clear about it what it covers.  It doesn't cover the content of an ETF. It means that betterments custodian will have the number of ETF shares they say they have.  You can start another discussion if you want to talk about how much sense it makes sense to split accounts for this protection. It has nothing to do with this discussion.

Foobar,

Just to define terms if you are talking about a .25% expense ratio costing you $3000 you are talking about a portfolio size of $1,200,000, at which point your expense ratio with Betterment would be 0.15% meaning you would have to have a portfolio of $2,000,000 to pay $3000 in expenses.

I personally wouldn't want more than 250,000 in any one brokerage account in order to stay under SIPC insurance limits.

Alexi

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Re: Betterment vs Vanguard II: Less name calling, more data.
« Reply #28 on: May 19, 2014, 09:42:43 AM »
I disagree that the SIPC issue is not relevant to the topic.

It is important to define your terms. So if you raise the prospect of having to pay pay $3000 in annual fees it's important for everyone to know that you're talking about a portfolio of $2 million.

This is well outside the bounds of the normal use of Betterment. And in fact would not be suggested because were the firm to be involved in fraud, not placing your orders as advertised, you would only be protected up to $500,000.

So if we were to limit The portfolio size within Betterment to $500,000, no one would ever pay more than $750 in annual fees.
 
Alexi




foobar

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Re: Betterment vs Vanguard II: Less name calling, more data.
« Reply #29 on: May 19, 2014, 01:25:45 PM »
So you saying Betterment is only for poor people? What do you suggest people do when they get real amounts of cash?:) And for what it is worth I consider 750/yr a sizable chunk of money also.

The reason SIPC doesn't matter is you still have to invest all your money. If you do it with 6+ betterment accounts (his&her iras and roths, his&her taxable, joint taxable) or if you spread it across multiple vendors (i.e. how much return are you willing to sacrifice to avoid this risk?) or multiple vanguard accounts doesn't change the problem of you having to invest your money and either you think it is worthwhile to pay someone else or you want to do it yourself..

I disagree that the SIPC issue is not relevant to the topic.

It is important to define your terms. So if you raise the prospect of having to pay pay $3000 in annual fees it's important for everyone to know that you're talking about a portfolio of $2 million.

This is well outside the bounds of the normal use of Betterment. And in fact would not be suggested because were the firm to be involved in fraud, not placing your orders as advertised, you would only be protected up to $500,000.

So if we were to limit The portfolio size within Betterment to $500,000, no one would ever pay more than $750 in annual fees.
 
Alexi

RapmasterD

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Re: Betterment vs Vanguard II: Less name calling, more data.
« Reply #30 on: May 19, 2014, 01:27:40 PM »
Betterment Account Protection Statement
Source: http://support.betterment.com/customer/portal/articles/934707-is-my-money-insured-
Betterment Securities provides brokerage services to all Betterment customers. Betterment Securities is a member of the Securities Investor Protection Corp (SIPC), which means that the securities in your account are protected up to $500,000.  For details, please see www.sipc.org. Unlike FDIC insurance for banks, SIPC does not protect against loss of principal due to movements in the market value of your securities.

Vanguard Account Protection Statement
Source: https://personal.vanguard.com/us/whatweoffer/stocksbondscds/accountprotection
Securities in your brokerage account are held in custody by Vanguard Brokerage Services, a division of Vanguard Marketing Corporation. Vanguard Marketing Corporation is a member of the Securities Investor Protection Corporation (SIPC), which protects securities customers of its members up to $500,000 (including $250,000 for claims for cash). Explanatory brochure available upon request or at sipc.org.

To offer greater protection and security, Vanguard Marketing Corporation has secured additional coverage from certain insurers at Lloyd's of London and London Company Insurers for eligible customers with an aggregate limit of $250 million, incorporating a customer limit of $49.5 million for securities and $1.75 million for cash. Coverage provided by SIPC and certain Lloyd's of London and London Company Insurers does not protect against loss of market value of securities. The policy provided by certain Lloyd's of London and London Company Insurers is subject to its own terms and conditions.

Fidelity Account Protection Statement -- Excess of SIPC
Source: https://www.fidelity.com/why-fidelity/safeguarding-your-accounts
Excess of SIPC
In addition to SIPC protection, Fidelity provides its brokerage customers with additional "excess of SIPC" coverage. The excess coverage would only be used when SIPC coverage is exhausted. Like SIPC, excess protection does not cover investment losses in customer accounts due to market fluctuation. It also does not cover other claims for losses incurred while broker-dealers remain in business. For example, fraud claims would not be covered if the brokerage firm was still in operation. Total aggregate excess of SIPC coverage available through Fidelity's excess of SIPC policy is $1 billion. Within Fidelity's excess of SIPC coverage, there is no per account dollar limit on coverage of securities, but there is a per account limit of $1.9 million on coverage of cash awaiting investment. This is the maximum excess of SIPC protection currently available in the brokerage industry.

Both SIPC and excess of SIPC coverage is limited to securities held in brokerage positions, including mutual funds if held in your brokerage account and securities held in book entry form.

At surface level, it appears both Vanguard and Fidelity offer protection in excess of SIPC limits.
« Last Edit: May 19, 2014, 01:34:00 PM by RapmasterD »

homeymomma

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Re: Betterment vs Vanguard II: Less name calling, more data.
« Reply #31 on: May 19, 2014, 01:54:58 PM »
I'm sympathetic to Betterment as a way to attain good results for most people over what they would attain without such an easy platform - I think a lot of those here on this forum are so good at DIY for every aspect of life they forget how lazy most people are. If most people can't even remember to pay their credit card or cable bills on time, how can they remember to rebalance?

On the other hand, for those who are mustachians, Vanguard is clearly the better choice.

This is 100% me (the lazy person)! So I just want to add that as someone with zero background in investing or finances at all, betterment offered a way in that was less scary and seemingly less likely to fail purely because of user error. I've been with betterment for over a year and only recently drummed up the courage to open a vanguard account as well. I still haven't figured out how to invest in anything other than VFINX in vanguard.
This is not the point of your comparison, but I'd just like to point out that if I had waited to feel confident enough to jump straight in with vanguard, I would have lost out on over $1000 last year. So in my case, betterment was worth every penny! I also noticed that the tax info import was really easy and I would have had no clue how to do it myself from my taxable account.
Also I don't think that to be a mustachian in lifestyle and financial independence you have to necessarily be an investing whiz, you just have to understand the basics enough to know to wait out the market. Betterment provides a way in for twenty-something novices like me with no one around to hand hold or provide advice. That being said, if I ever inherit a large windfall, it will be going in to a vanguard account, not betterment! :)

milesdividendmd

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Re: Betterment vs Vanguard II: Less name calling, more data.
« Reply #32 on: May 19, 2014, 02:57:58 PM »
Foobar,

Your point about investing within the same provider with multiple accounts is interesting. I was under the impression that SIPC insurance covered up to the 500k limit per SSN per brokerage. I plan to split up my nest egg amongst multiple brokerages, none greater than 500K.

Alexi

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Re: Betterment vs Vanguard II: Less name calling, more data.
« Reply #33 on: May 19, 2014, 03:38:20 PM »
Homeymamma,

Great point. You are probably in the 95th percentile at least as far as financial intelligence/savvy.

Sometimes this board feels like a triathletes forum where everyone looks down their  noses at people who are too lazy to complete an iron man.

We all have strengths and weaknesses and areas where we want to spend our time  and areas where we'd rather tpend our money.

Even MMM  himself doesn't do his own drywall. Why? because he values his time more than the money saved by  not hiring experts to do it more efficiently.

You ar a perfect example of someone who got real value out of this product.

Alexi


RapmasterD

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Re: Betterment vs Vanguard II: Less name calling, more data.
« Reply #34 on: May 20, 2014, 06:45:15 AM »
I'm sympathetic to Betterment as a way to attain good results for most people over what they would attain without such an easy platform - I think a lot of those here on this forum are so good at DIY for every aspect of life they forget how lazy most people are. If most people can't even remember to pay their credit card or cable bills on time, how can they remember to rebalance?

On the other hand, for those who are mustachians, Vanguard is clearly the better choice.

This is 100% me (the lazy person)! So I just want to add that as someone with zero background in investing or finances at all, betterment offered a way in that was less scary and seemingly less likely to fail purely because of user error. I've been with betterment for over a year and only recently drummed up the courage to open a vanguard account as well. I still haven't figured out how to invest in anything other than VFINX in vanguard.
This is not the point of your comparison, but I'd just like to point out that if I had waited to feel confident enough to jump straight in with vanguard, I would have lost out on over $1000 last year. So in my case, betterment was worth every penny! I also noticed that the tax info import was really easy and I would have had no clue how to do it myself from my taxable account.
Also I don't think that to be a mustachian in lifestyle and financial independence you have to necessarily be an investing whiz, you just have to understand the basics enough to know to wait out the market. Betterment provides a way in for twenty-something novices like me with no one around to hand hold or provide advice. That being said, if I ever inherit a large windfall, it will be going in to a vanguard account, not betterment! :)

I'd suggest reading this blog post. I don't know the guy - no affiliation. LINK: http://jlcollinsnh.com/2011/06/08/how-i-failed-my-daughter-and-a-simple-path-to-wealth/

hodedofome

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Re: Betterment vs Vanguard II: Less name calling, more data.
« Reply #35 on: May 30, 2014, 01:13:06 PM »
Saw this blog post today and thought it'd be a good addition to this thread.

http://mebfaber.com/2014/05/30/the-wealthfront-and-betterment-allocations/

Mr. FI

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Re: Betterment vs Vanguard II: Less name calling, more data.
« Reply #36 on: May 30, 2014, 02:13:06 PM »
Saw this blog post today and thought it'd be a good addition to this thread.

http://mebfaber.com/2014/05/30/the-wealthfront-and-betterment-allocations/

So can someone interpret this data for me? It seems to have a positive tone for Betterment, but I'm not sure how to read the data based on his categories.

foobar

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Re: Betterment vs Vanguard II: Less name calling, more data.
« Reply #37 on: May 30, 2014, 04:17:05 PM »
What conclusion are you looking for? Use betterment versus paying something 2%? That is easy. Pay someone .25% to save you 10/hrs per year? That is a lot more questionable.  Don't read too much detail into the numbers (i.e. who knows if expenses and the like were accounted for properly) but notice how you can get similar returns either by betting big on value (betterment) or putting a lot of money into emerging markets (wealthfront).


Saw this blog post today and thought it'd be a good addition to this thread.

http://mebfaber.com/2014/05/30/the-wealthfront-and-betterment-allocations/

So can someone interpret this data for me? It seems to have a positive tone for Betterment, but I'm not sure how to read the data based on his categories.

Mustache Police

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Re: Betterment vs Vanguard II: Less name calling, more data.
« Reply #38 on: May 30, 2014, 06:22:28 PM »
These are the conclusions I would draw.

For the period from 1973 to 2001:

1.  Before accounting for costs (I assume) , portfolios with improved diversification and improved efficiency (as in the wealthfront and betterment portfolios) did improve CAGR. (ie the money you actually take home was significantly more  when compared to a simple 60/40 portfolio of identical equity:bond ratio - 10.53 vs 9.48)
2.  Assuming that costs were not included in the analysis, then when cost differences are added in, its anyone's guess who wins. 
3. It's possible that betterment customers get more for their 0.25% ER than saving a mere 10 hours of work.
4. Backtesting is always suspect and offers limited insight into future performance.

Further points

3.  Vanguard charges more for an inferior product when it comes to "portfolio management." 
4.   Fidelity Schwab and Amerivest should be ashamed of themselves for their portfolio management fees. 
4.  Personal Capital is a total ripoff and should be used for its website only (which is fantastic.)

MP



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Re: Betterment vs Vanguard II: Less name calling, more data.
« Reply #39 on: May 31, 2014, 06:40:19 PM »
Look.

Betterment charges fees to invest your money on top the underlying investments. A lot, IMHO.

Betterment do not have a magic ball. Arguing the forward performance of the specific AA vs any other is pointless.  And besides the point. I think the 'other people can beat the market long term' ship had sailed. They can't. 

there is no real systematic advantage to rebalancing more frequently than 1 time per year unless AA gets too far out 5% say, then rebalance. Daily, hourly, weekly rebalance is not a big deal and may even hurt returns,  vs what is really important, increasing your savings rate and the luck of your chosen AA, lowering fees and minimizing taxes,...

tell you what. If betterment really does represent 0.2% of perceived value in the market, let's leverage the MMM brand, and we'll take care of their money for a bargain 0.01% less than betterment charge. We'll use transparent vanguard funds, and work on minimising the champagne we buy with the 0.14% of the fund's value.

Arebelspy can be chairman, and between the rest of the senior mustashians I'm sure ill be pretty easy. We'll take half the fees. MMM takes a sweet 50% just for the brand.

for christ's sake.




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Re: Betterment vs Vanguard II: Less name calling, more data.
« Reply #40 on: May 31, 2014, 06:47:01 PM »
Look.

Betterment charges fees to invest your money on top the underlying investments. A lot, IMHO.

Betterment do not have a magic ball. Arguing the forward performance of the specific AA vs any other is pointless.  And besides the point. I think the 'other people can beat the market long term' ship had sailed. They can't. 

there is no real systematic advantage to rebalancing more frequently than 1 time per year unless AA gets too far out 5% say, then rebalance. Daily, hourly, weekly rebalance is not a big deal and may even hurt returns,  vs what is really important, increasing your savings rate and the luck of your chosen AA, lowering fees and minimizing taxes,...

tell you what. If betterment really does represent 0.2% of perceived value in the market, let's leverage the MMM brand, and we'll take care of their money for a bargain 0.01% less than betterment charge. We'll use transparent vanguard funds, and work on minimising the champagne we buy with the 0.14% of the fund's value.

Arebelspy can be chairman, and between the rest of the senior mustashians I'm sure ill be pretty easy. We'll take half the fees. MMM takes a sweet 50% just for the brand.

for christ's sake.

I find the use of the term "for christ's sake" to be fairly offensive. Let's rephrase that to make it more consumable. Here goes: For FUCK sake. This thread is still alive? BTW Mr Mark, agree with everything you've said, including the fa christ sake!

Mr Mark

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Re: Betterment vs Vanguard II: Less name calling, more data.
« Reply #41 on: May 31, 2014, 06:50:38 PM »
I would see just a handful of low cost funds, after we do a deal with Vanguard.

- accumulator fund (pre-FIRE)

- safe withdrawal rate fund (post-FIRE)

- cash on hand money market ish fund ( emergency funds, deposits for houses, market timers, et al.)

Less than optimal returns vs doing it yourself?  Yep!

better than what most people end up doing? Yep!

Totally taking advantage of financial nativity among the general populace?  Why should we be the only ones no doing that. We could be super ethical and implement a training programme that encourages people to go to Vanguard directly. 

Mr Mark

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Re: Betterment vs Vanguard II: Less name calling, more data.
« Reply #42 on: May 31, 2014, 06:56:05 PM »


I find the use of the term "for christ's sake" to be fairly offensive. Let's rephrase that to make it more consumable. Here goes: For FUCK sake. This thread is still alive? BTW Mr Mark, agree with everything you've said, including the fa christ sake!

sorry rapmasterD, but this thread keeps going,... and where I come from that's not considered offensive.  But this is an international forum. So, for %=₩+ sake!

RapmasterD

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Re: Betterment vs Vanguard II: Less name calling, more data.
« Reply #43 on: May 31, 2014, 09:12:21 PM »
Oh I'm not offended. It's just words, baby...We're all here for the BETTERMENT of society. https://www.youtube.com/watch?v=gpaOy8b8X6A

foobar

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Re: Betterment vs Vanguard II: Less name calling, more data.
« Reply #44 on: May 31, 2014, 09:13:17 PM »
3) Nope. If you want a betterment portfolio (i.e the exact same investments), it will take you about 10 hrs per year to manage. The rebalancing will be different but research has shown that rebalancing daily, monthly or yearly doesn't make a difference (i.e. depending on what is going on any of those strategies can be the best and it changes over time).  You can do a small and value tilt with any portfolio. And seriously rebalancing is trivially easy to do

4) haven't you heard how "tactical weighting" gets you an extra 2% which more than makes up for the fee?:) Just don't backtest too far:) Or just buy an equal weight mutual fund.



3. It's possible that betterment customers get more for their 0.25% ER than saving a mere 10 hours of work.

4.  Personal Capital is a total ripoff and should be used for its website only (which is fantastic.)

MP