Author Topic: Betterment?  (Read 83114 times)

Dodge

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Re: Betterment?
« Reply #50 on: September 05, 2014, 07:34:45 PM »
I define benefit as more money in the investors pocket. How do you define-benefit?

Sorry, sent that last one prematurely.  I was referring to a benefit on a risk-adjusted basis.  If there was no free lunch, then I'd expect the return to be in line with the amount of risk, in which case, there was no benefit compared to the index.

milesdividendmd

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Betterment?
« Reply #51 on: September 05, 2014, 08:15:06 PM »
Then just invest 90% intermediate term treasuries. You will get returns in proportion to your risk.

Beric01

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Re: Betterment?
« Reply #52 on: September 05, 2014, 09:03:32 PM »
You guys are really getting off topic - we're talking about Betterment here. Here's the point:

  • Betterment offers no better returns that just buying standard Vanguard Funds, and also charges an extra fee on top.
  • Betterment offers less flexibility in choosing one's investments, and Betterment could change their allocation, even if undesired by the participant.
  • Betterment carries the additional risk of Betterment itself, and not just the risk of the Vanguard funds. What if the company goes under?
  • Betterment's entire business model is to make it easier to invest. This might save someone 1 hour when setting up their initial investments. However, simply investing in Betterment requires one to do due diligence to make certain the company is not a scam, negating any time saved.

I can't see the value, and thus I can't recommend it to anyone.

Honest Abe

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Re: Betterment?
« Reply #53 on: September 08, 2014, 03:48:03 AM »
I like it. It's an all-seeing, never-blinking robot that invests my money optimally at all times. For taxable account the tax management is second to none. I could do this myself but I'm busy. Worth the .15% IMO.

boognish

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Re: Betterment?
« Reply #54 on: September 15, 2014, 10:16:15 AM »
Bump for the Mad Fientist's latest post

http://www.madfientist.com/moving-my-money-to-betterment/

Curious what you folks think


4alpacas

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Re: Betterment?
« Reply #55 on: September 15, 2014, 10:51:40 AM »
Bump for the Mad Fientist's latest post

http://www.madfientist.com/moving-my-money-to-betterment/

Curious what you folks think
I'm checking out this thread because of the MF post too.  I'm also unfamiliar with the idea of tax-loss harvesting.  Does anyone have a quick definition or a resource I could check out?


boognish

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Re: Betterment?
« Reply #56 on: September 15, 2014, 10:57:52 AM »
Bump for the Mad Fientist's latest post

http://www.madfientist.com/moving-my-money-to-betterment/

Curious what you folks think
I'm checking out this thread because of the MF post too.  I'm also unfamiliar with the idea of tax-loss harvesting.  Does anyone have a quick definition or a resource I could check out?
https://www.betterment.com/resources/tax-loss-harvesting-white-paper/

Here's a breakdown from Betterment

4alpacas

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Re: Betterment?
« Reply #57 on: September 15, 2014, 11:03:22 AM »
Thanks, boognish! 

I'm going to do a lot more research on this process, but I'm starting to warm up to the idea for my brokerage account.

arebelspy

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Re: Betterment?
« Reply #58 on: September 15, 2014, 11:07:09 AM »
Bump for the Mad Fientist's latest post

http://www.madfientist.com/moving-my-money-to-betterment/

Curious what you folks think

MFMF has another great post, as he always does.  Algorithmic TLH may actually make Bettermint worth paying them 0.15% to invest in Vanguard for you.  And I like how his sole motivation isn't to make money on referral fees.
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Beric01

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Re: Betterment?
« Reply #59 on: September 15, 2014, 11:38:57 AM »
This is kind of interesting I'll admit, but it just doesn't really work for me, at least not pre-FIRE. The problem is, Betterment is a complete solution. However, as an employee with a 401(k), I don't need a complete solution. I can't put my 401(k) in Betterment! And I'm far better off tax-wise putting my more heavily taxed assets (such as my bond funds and my international stock funds) in my 401(k) and my domestic stocks in my taxable. But Betterment doesn't let you buy a specific asset class - you can only buy stocks and/or bonds.

So, already having international stocks and domestic bonds in my 401(k) for tax efficiency, all I need to complete my portfolio is domestic stocks. But since I can't choose just domestic stocks at Betterment, I would be poorly diversified with a 100% stock allocation. My 401(k) doesn't offer a good low-cost domestic stock index like VTSAX (only international and domestic bond) or I could hold 2 fully balanced portfolios. Add the fact the Betterment bond funds in a taxable account will be fully taxed, and I'm in for some trouble.

I don't know how much Betterment will give you with tax-loss harvesting, but it can't be more than I'll lose by adjusting my allocation across my tax-deferred vs taxable accounts and paying more in taxes. Will have to wait and see once they release more data.

foobar

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Re: Betterment?
« Reply #60 on: September 15, 2014, 11:41:40 AM »
I like it. It's an all-seeing, never-blinking robot that invests my money optimally at all times. For taxable account the tax management is second to none. I could do this myself but I'm busy. Worth the .15% IMO.

Last time I checked wealthfront was better. Buying an managing a portfolio of 501 stocks is something that only a robo advisor can do easily. Tax loss harvest at the ETF level is something that anyone can do.

GGNoob

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Re: Betterment?
« Reply #61 on: September 15, 2014, 11:48:28 AM »
My initial thought with Betterment was to keep my IRA's and taxable investments there. Then my wife's 401k and HSA would be invested in funds that are not the same as the ETFs Betterment uses. Then since Betterment has control of the IRA's, they could do their TLH without creating any wash sales. The benefit from TLH would more than pay for the fees.

But then my wife's 401k funds were updated away from expensive active funds to Vanguard Index funds. Because I wanted to take advantage of those cheap funds (VTSAX) without risking wash sales, I decided I'd move my taxable and IRA accounts to Vanguard so I'd have more control over my asset allocation. I also didn't want to have to choose funds I didn't care to own in the 401k and HSA just to benefit my taxable account.

I now created an investment plan that will allow me to contribute more to tax-advantaged accounts and less to my taxable account anyhow, so TLH won't be as important as I thought it was going to be.

MF's post is very good and moving taxable investments to Betterment can make a lot of sense for some people. If you plan to do TLH, its going to be hard to beat the results that software can give you.

DollarsAndDissonance

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Re: Betterment?
« Reply #62 on: September 15, 2014, 08:39:28 PM »
Mad Fientist's endorsement has really piqued my interest.  The tax loss harvesting, automatic rebalancing, and tax-minimized sale accounting seem to be worth the minimal 0.15% fee, in my view.

In order to take advantage of the features, though, I think I would need to sell my positions in those ETFs in my taxable brokerage account.  I'm sitting on a couple thousand dollars of gains in those ETFs, mostly long-term.  My income is also the highest it's ever been and likely ever will be (28% bracket).  Seems like it's not worth incurring those capital gains just to move over.  Any thoughts?

arebelspy

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Re: Betterment?
« Reply #63 on: September 15, 2014, 08:53:08 PM »
In order to take advantage of the features, though, I think I would need to sell my positions in those ETFs in my taxable brokerage account.

Why not just start a new account there and put future taxable contributions in it, and leave what you have until you're FIRE'd in a lower tax bracket?
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milesdividendmd

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Re: Betterment?
« Reply #64 on: September 15, 2014, 09:51:35 PM »
On a granular level, there is no one who's early retirement financial analysis is as insightful and detailed as the mad fientist.

I was thrilled and surprised to read his post today, because his view of Betterment closely mirrors my own.

For taxable accounts greater than $50,000, Betterment is truly a no-brainer. This is particularly true for Mustachians who plan to have lean retirements.

The argument goes that tax loss harvesting is not so valuable because it only delays taxes and does not get rid of them. But for those who plan to never earn above the 15% tax bracket in earned income during retirement, it is possible to not pay taxes now (via TLH) when capital glgains might be taxed due to current income, and not pay taxes and retirement because the capital gains and dividends are not taxed (at least at this point) for those in the 15% and lower tax brackets.

The only negative I can see with the MF approach, is that one cannot tax gain  harvest with Betterment. Of course if you never have to pay taxes in retirement due to your low earned income, this is sort of a non issue.

The final point I would make is less quantitative. But I'm glad to see that someone whose opinion I trust also recognizes quality mission of betterment.

Their transparency, user centered mentality, and commitment to continued improvement become quite obvious when you use their products. In the Robo advisor niche they are the exception, not the rule.
« Last Edit: September 15, 2014, 09:53:54 PM by milesdividendmd »

Beric01

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Re: Betterment?
« Reply #65 on: September 15, 2014, 09:56:56 PM »
The only negative I can see with the MF approach, is that one cannot tax gain  harvest with Betterment. Of course if you never have to pay taxes in retirement due to your low earned income, this is sort of a known issue.

What about the negative I brought up, where due to its inflexibility you can't choose certain asset classes? Buying bonds in a taxable account is a major negative, particularly if you plan to avoid taxes on those bonds completely once reaching FIRE? Also, I can't select only domestic stocks due to having international stocks in my 401(k).

I don't need a complete solution. If I have a fully allocated portfolio with Betterment, that doesn't match up with my limited-option 401(k), and it also doesn't allow for tax optimization across multiple accounts, which means it doesn't matter what is available in your 401(k).

I only way I can see this being a good idea is if your income is so high that maxing out your 401(k) contributions is a drop in the bucket.

DollarsAndDissonance

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Re: Betterment?
« Reply #66 on: September 15, 2014, 10:00:38 PM »
Why not just start a new account there and put future taxable contributions in it, and leave what you have until you're FIRE'd in a lower tax bracket?

Betterment recommends against holding any of the ETFs in their portfolio in any other accounts to avoid issues with tax loss harvesting and wash sales.  Now that I think about it, though, I suppose that would only be a problem if I bought or sold those ETFs in my other account, which I could avoid.

milesdividendmd

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Re: Betterment?
« Reply #67 on: September 15, 2014, 10:06:05 PM »
One thing I would say is that Betterment optimizes your portfolio based on whether it is a taxable or nontaxable account. If you choose to have bonds in your account, and it is a taxable account, They will place the majority of your bonds in tax efficient bond funds such as municipal bond funds.

In addition you can always choose to have 100% stocks invested in your Betterment account.

From my experience investing a small amount of my portfolio with them I can report how very investor focused they are.

After you invest, if they see a way to improve your portfolio, they will call you and ask if it is okay for them to do so (like moving bonds into tax efficient bond funds).

Although you can't pick out individual investments, their portfolio checks all the boxes in modern portfolio theory.

And in terms of not messing up their TLH algorithm with your retirement account holdings, this is actually quite easy to avoid.  Simply choose not to own ETFs in your non-Betterment accounts, since they invest in ETFs only and not mutual funds.

arebelspy

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Re: Betterment?
« Reply #68 on: September 15, 2014, 10:35:27 PM »
And in terms of not messing up their TLH algorithm with your retirement account holdings, this is actually quite easy to avoid.  Simply choose not to own ETFs in your non-Betterment accounts, since they invest in ETFs only and not mutual funds.

The problem was that you already own them and don't want to sell due to capital gains, thus why you aren't just moving those funds to Bettermint.  So selling them and buying mutual funds isn't a solution to that problem.
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milesdividendmd

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Re: Betterment?
« Reply #69 on: September 15, 2014, 10:50:13 PM »
And in terms of not messing up their TLH algorithm with your retirement account holdings, this is actually quite easy to avoid.  Simply choose not to own ETFs in your non-Betterment accounts, since they invest in ETFs only and not mutual funds.

The problem was that you already own them and don't want to sell due to capital gains, thus why you aren't just moving those funds to Bettermint.  So selling them and buying mutual funds isn't a solution to that problem.

That is a good point if you already own the same ETFS in a taxable account. In a retirement account there is no tax cost to switch investments.

In this specific case the move would be to change future elections to mutual funds, and turn off dividend reinvestment for the ETFs in question.


arebelspy

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Re: Betterment?
« Reply #70 on: September 15, 2014, 11:29:03 PM »
And in terms of not messing up their TLH algorithm with your retirement account holdings, this is actually quite easy to avoid.  Simply choose not to own ETFs in your non-Betterment accounts, since they invest in ETFs only and not mutual funds.

The problem was that you already own them and don't want to sell due to capital gains, thus why you aren't just moving those funds to Bettermint.  So selling them and buying mutual funds isn't a solution to that problem.

That is a good point if you already own the same ETFS in a taxable account. In a retirement account there is no tax cost to switch investments.

In this specific case the move would be to change future elections to mutual funds, and turn off dividend reinvestment for the ETFs in question.

Yeah, turning off dividend reinvestment is correct, but I think the move would be for future contributions to go to Bettermint, not mutual funds the other account, under the above assumptions (one wants to change to BM for some specific reason like TLH).
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GGNoob

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Re: Betterment?
« Reply #71 on: September 16, 2014, 06:50:56 AM »
And in terms of not messing up their TLH algorithm with your retirement account holdings, this is actually quite easy to avoid.  Simply choose not to own ETFs in your non-Betterment accounts, since they invest in ETFs only and not mutual funds.

Betterment says that it doesn't matter if its an ETF or MF, but as long as it tracks the same index, it could cause wash sales: http://support.betterment.com/customer/portal/articles/1595496-can-i-still-use-tax-loss-harvesting-if-i-have-overlapping-securities-in-other-accounts-what-are-those-overlapping-securities-?_ga=1.131222090.49694029.1406129446

Dodge

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Re: Betterment?
« Reply #72 on: September 16, 2014, 08:10:07 AM »

You guys are really getting off topic - we're talking about Betterment here. Here's the point:

  • Betterment offers no better returns that just buying standard Vanguard Funds, and also charges an extra fee on top.
  • Betterment offers less flexibility in choosing one's investments, and Betterment could change their allocation, even if undesired by the participant.
  • Betterment carries the additional risk of Betterment itself, and not just the risk of the Vanguard funds. What if the company goes under?
  • Betterment's entire business model is to make it easier to invest. This might save someone 1 hour when setting up their initial investments. However, simply investing in Betterment requires one to do due diligence to make certain the company is not a scam, negating any time saved.

I can't see the value, and thus I can't recommend it to anyone.

Not to mention the fact that you can't choose your own individual investments. You have to trust they do the right thing with your money. Apparently their 100% stock portfolio is flat in the last few months (or so I've heard), whereas the S&P500 and VTSAX are up 2.5%, and an 80/20 stock/bond 3-Fund portfolio is up 1.5%

Of course a few months worth of data is meaningless, but that's the point. These startups (Wealthfront and Betterment) are new, and there's no telling if their back testing of the Tax Loss Harvesting robot will perform well into the future. There's no telling if their portfolio decisions and asset allocation will backfire, or change. There's no telling if these companies will even still be around in 5-10 years. Would you be forced to take your money out, incurring a huge tax bill, if the company goes under?

There has already been one case of these companies completely changing their investment strategy. What happens if 10 years from now they need more profit and switch to active funds? Will you take all your money out and incur 10 years of capital gains taxes, or trust their active traders know what they're doing? It doesn't seem to be possible to transfer your VTI holdings to another company if you want to leave, but correct me if I'm wrong.

While I'm glad there are choices out there, I personally feel more comfortable putting my money in a company like Vanguard, where the company is owned by us, and there are no stock owners or investors (who want to maximize profit) to please. If a company like Betterment sees their tax loss harvesting robot actually offers no gain, but is important in bringing in customers, they will be more likely to keep it around vs a company like Vanguard.

My life savings, and ability to retire, simply isn't worth it.

DollarsAndDissonance

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Re: Betterment?
« Reply #73 on: September 16, 2014, 08:36:27 AM »
Interesting points, Dodge.

To me, one of the biggest causes for concern is that the Betterment "robot" makes rebalancing and tax loss harvesting trades without any human approval.  That's probably fine 99.9% of the time, but you're counting on their algorithm to be written perfectly, even in bizarre situations like the 2010 flash crash.  Not sure I'm comfortable betting most of my retirement savings on that.

milesdividendmd

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Re: Betterment?
« Reply #74 on: September 16, 2014, 08:52:51 AM »

And in terms of not messing up their TLH algorithm with your retirement account holdings, this is actually quite easy to avoid.  Simply choose not to own ETFs in your non-Betterment accounts, since they invest in ETFs only and not mutual funds.

Betterment says that it doesn't matter if its an ETF or MF, but as long as it tracks the same index, it could cause wash sales: http://support.betterment.com/customer/portal/articles/1595496-can-i-still-use-tax-loss-harvesting-if-i-have-overlapping-securities-in-other-accounts-what-are-those-overlapping-securities-?_ga=1.131222090.49694029.1406129446

I had missed this.

Thanks for clarifying.

AZ

brooklynguy

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Re: Betterment?
« Reply #75 on: September 16, 2014, 09:58:20 AM »
Is there a source of data to indicate that Betterment's algorithmic tax loss harvesting actually produces beneficial results in light of the increased trading and jumping around into different investments?  The data in the Mad Fientist's post seem to speak only to absolute dollar amounts of tax losses harvested, without accounting for any differential in the performance between the original investment and the comparable position taken to avoid wash sales.  The average numbers included in the post for tax losses harvested this year seem like small enough percentages of the total portfolio values that they may be more than offset by the opportunity costs of being in different (but similar/comparable) investments.

foobar

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Re: Betterment?
« Reply #76 on: September 16, 2014, 12:24:54 PM »
Is there a source of data to indicate that Betterment's algorithmic tax loss harvesting actually produces beneficial results in light of the increased trading and jumping around into different investments?  The data in the Mad Fientist's post seem to speak only to absolute dollar amounts of tax losses harvested, without accounting for any differential in the performance between the original investment and the comparable position taken to avoid wash sales.  The average numbers included in the post for tax losses harvested this year seem like small enough percentages of the total portfolio values that they may be more than offset by the opportunity costs of being in different (but similar/comparable) investments.

Other companies have done studies and yes there is a gain. The difference between VTI and SCHB for example is pretty much zero so it doesn't matter if you hold 100k of VTI and 0k of SCHB or 50k of VTI And 50k of SCHB. The other ones are a little less correlated but the ERs.

That being said the value of tax loss harvesting depends a bit on the period. 2000-2013 is above average (i.e. those huge losses at the  start and middle) for the benefit of tax loss harvesting. And it depends on your current income and future ones. Tax loss harvesting in 2008 to save 15% wasn't a win if you had to sell in 2014 and had to pay  24%. Or in a more common case, you generate enough income to cause you SS to be taxed at 27% or 46% due to added income.  You would need to put in your exact projections (i.e. if you plan on donating your stock, the value of TLH goes way up. Plan on being rich in retirement, it goes down).

It is worth doing in my opinion but it isn't some magical tool that will lead to some great outperformance. If you lucky you will get another .25-.5% (that is definitely nice. Paying .15%+ for it though is borderline).

brooklynguy

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Re: Betterment?
« Reply #77 on: September 16, 2014, 01:34:52 PM »
Other companies have done studies and yes there is a gain. The difference between VTI and SCHB for example is pretty much zero so it doesn't matter if you hold 100k of VTI and 0k of SCHB or 50k of VTI And 50k of SCHB. The other ones are a little less correlated but the ERs.

Google Finance says the differential in performance between VTI and SCHB over the past year was 0.16%.  I suppose the performance differences could cut either way and therefore should on average cancel each other out, but if the benefits are small enough that Betterment's small fee makes it a borderline call then performance differentials in the wrong direction seem like they can completely erase the benefits.

foobar

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Re: Betterment?
« Reply #78 on: September 16, 2014, 07:20:02 PM »
Other companies have done studies and yes there is a gain. The difference between VTI and SCHB for example is pretty much zero so it doesn't matter if you hold 100k of VTI and 0k of SCHB or 50k of VTI And 50k of SCHB. The other ones are a little less correlated but the ERs.

Google Finance says the differential in performance between VTI and SCHB over the past year was 0.16%.  I suppose the performance differences could cut either way and therefore should on average cancel each other out, but if the benefits are small enough that Betterment's small fee makes it a borderline call then performance differentials in the wrong direction seem like they can completely erase the benefits.

Over 3 years (longest SCHB goes back) the difference is .03 in the NAV and .01 in the price. I would consider that in the random noise factor. The do hold slightly different stocks (turns out picking a total market isn't 100% passive) but they are similar and I actually expect the different to drop even more as SCHB assets grow. The value ETFs do vary more (personally I hate the Russell 2k value ones). You would have to run some 4 factor analysis to decide what you losing or gaining when you switch. It should be pointed out that some of the indexes that the alternative funds use are the same one that vanguard used to follow (they changed up to save  money is my understanding).

One other thing to remember about tax loss harvesting is that the longer you are invested, the less it matters. If you invested 100k in 2000, you had a lot of losses to harvest. If you invested that 100k in 1995 on the other hand, you are probably never going to tax harvest most of that money.  Once you start having 100%+ appreciation in your ETF shares, they basically no longer are useful for tax loss harvesting (well unless the great depression happens).

Dodge

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Betterment?
« Reply #79 on: September 16, 2014, 09:39:48 PM »

You guys are really getting off topic - we're talking about Betterment here. Here's the point:

  • Betterment offers no better returns that just buying standard Vanguard Funds, and also charges an extra fee on top.
  • Betterment offers less flexibility in choosing one's investments, and Betterment could change their allocation, even if undesired by the participant.
  • Betterment carries the additional risk of Betterment itself, and not just the risk of the Vanguard funds. What if the company goes under?
  • Betterment's entire business model is to make it easier to invest. This might save someone 1 hour when setting up their initial investments. However, simply investing in Betterment requires one to do due diligence to make certain the company is not a scam, negating any time saved.

I can't see the value, and thus I can't recommend it to anyone.

Not to mention the fact that you can't choose your own individual investments. You have to trust they do the right thing with your money. Apparently their 100% stock portfolio is flat in the last few months (or so I've heard), whereas the S&P500 and VTSAX are up 2.5%, and an 80/20 stock/bond 3-Fund portfolio is up 1.5%

Of course a few months worth of data is meaningless, but that's the point. These startups (Wealthfront and Betterment) are new, and there's no telling if their back testing of the Tax Loss Harvesting robot will perform well into the future. There's no telling if their portfolio decisions and asset allocation will backfire, or change. There's no telling if these companies will even still be around in 5-10 years. Would you be forced to take your money out, incurring a huge tax bill, if the company goes under?

There has already been one case of these companies completely changing their investment strategy. What happens if 10 years from now they need more profit and switch to active funds? Will you take all your money out and incur 10 years of capital gains taxes, or trust their active traders know what they're doing? It doesn't seem to be possible to transfer your VTI holdings to another company if you want to leave, but correct me if I'm wrong.

While I'm glad there are choices out there, I personally feel more comfortable putting my money in a company like Vanguard, where the company is owned by us, and there are no stock owners or investors (who want to maximize profit) to please. If a company like Betterment sees their tax loss harvesting robot actually offers no gain, but is important in bringing in customers, they will be more likely to keep it around vs a company like Vanguard.

My life savings, and ability to retire, simply isn't worth it.

Just read that Betterment allows In-Kind transfers, with no fee. This means you can transfer your money out of VTI for example, and move it over to your Vanguard account if you ever want to leave.

Unfortunately, I also read that in order to avoid wash sales, you can't own any similar investments in any account, including retirement accounts. MadFientist is moving his 401k and IRA money around, to accommodate Betterment's tax loss harvesting robot, likely into higher fee funds, further eating into any gains.

Does this mean the ERs in his tax advantaged accounts will increase? If so, how much will that eat into his gains? Since ER is percentage based, and tax loss harvesting has a yearly max of $3,000, I can see this getting away from him very quickly.
« Last Edit: September 16, 2014, 09:44:12 PM by Dodge »

arebelspy

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Re: Betterment?
« Reply #80 on: September 16, 2014, 10:14:28 PM »
Does this mean the ERs in his tax advantaged accounts will increase? If so, how much will that eat into his gains? Since ER is percentage based, and tax loss harvesting has a yearly max of $3,000, I can see this getting away from him very quickly.

If TLH is capped at 3k and an expense ratio of 0.15% is added on top, one would need 2MM for the latter to surpass the former, assuming you have that much TLH.

I think the MF will have far less than that, especially given how much of a proponent he is of tax-advantaged accounts, and that he's only going to use BM for taxable.
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Dodge

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Re: Betterment?
« Reply #81 on: September 16, 2014, 10:36:42 PM »

Does this mean the ERs in his tax advantaged accounts will increase? If so, how much will that eat into his gains? Since ER is percentage based, and tax loss harvesting has a yearly max of $3,000, I can see this getting away from him very quickly.

If TLH is capped at 3k and an expense ratio of 0.15% is added on top, one would need 2MM for the latter to surpass the former, assuming you have that much TLH.

I think the MF will have far less than that, especially given how much of a proponent he is of tax-advantaged accounts, and that he's only going to use BM for taxable.

That doesn't take into account the tax bracket. If you're in the 25% tax bracket, the $3,000 deductible would save you $750 a year in taxes. With an additional 0.15 ER, you hit break even at $500,000. With an additional 0.20 ER, it breaks even at $375,000. With an additional 0.25 ER the break even point is $300,000...etc.unfortunately many 401K's don't have too many low cost options which would avoid a wash sale. I wonder how he handles this.

Also, I was referring to the additional ER he might incur, by being forced to change the holdings I'm his *tax advantaged* accounts, to avoid wash sales in his *after tax* Betterment account. Let's see how this adds up, assume:

1.  Additional 0.15 ER in taxable
2.  Additional 0.15 ER in 401k stock funds to avoid wash sale
3.  25% tax bracket

If this is the scenario, he would have to have less than $500,000 combined in taxable + 401k stock funds, in order to benefit from tax loss harvesting, under the ideal tax loss harvesting situation.

milesdividendmd

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Re: Betterment?
« Reply #82 on: September 16, 2014, 11:25:30 PM »
Is there a source of data to indicate that Betterment's algorithmic tax loss harvesting actually produces beneficial results in light of the increased trading and jumping around into different investments?  The data in the Mad Fientist's post seem to speak only to absolute dollar amounts of tax losses harvested, without accounting for any differential in the performance between the original investment and the comparable position taken to avoid wash sales.  The average numbers included in the post for tax losses harvested this year seem like small enough percentages of the total portfolio values that they may be more than offset by the opportunity costs of being in different (but similar/comparable) investments.

With Betterment there are no trading costs above and beyond the additional Betterment expense ratio (0.35% to 0.15% depending on the amount of assets under management. )

This makes the math pretty easy. If tax loss harvesting saves you more than 0.35% annually, you come out ahead by investing taxable investments with Betterment.

milesdividendmd

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Re: Betterment?
« Reply #83 on: September 16, 2014, 11:30:21 PM »
Does this mean the ERs in his tax advantaged accounts will increase? If so, how much will that eat into his gains? Since ER is percentage based, and tax loss harvesting has a yearly max of $3,000, I can see this getting away from him very quickly.

If TLH is capped at 3k and an expense ratio of 0.15% is added on top, one would need 2MM for the latter to surpass the former, assuming you have that much TLH.

I think the MF will have far less than that, especially given how much of a proponent he is of tax-advantaged accounts, and that he's only going to use BM for taxable.

TLH is not capped at $3000.

You simply cannot use tax loss harvesting to write off more than $3000 of earned income on any given year.

You can however use tax loss harvesting to write off unlimited amounts of capital gains. And you can also carry forward tax losses to future years to avoid paying taxes on earned income and capital gains in the future.

(This is why Romney had to really bend over backwards to pay even 13% taxes in 2011.) he was still harvesting losses from 2008.

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Re: Betterment?
« Reply #84 on: September 17, 2014, 06:35:06 AM »
People should also remember tax loss harvesting isn't rocket science. Yes the daily stuff that wealthfront and betterment due is better than sitting down once a quarter(or monthly) and doing this manually but not by a ton.  TLH is one of those things that sounds awesome when you first hear about it but in reality it is just one of those nice things. Once you even things out (i.e. liquidate the portfolio) a ton of that so called tax alpha just vanishes. Definitely tax harvest. But paying .15% for it is stupid. If you need the hand holding for investing (or it makes you feel better/more able to stay the course), then you might get value for your AUM fee.

brooklynguy

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Re: Betterment?
« Reply #85 on: September 17, 2014, 07:16:50 AM »
Miles, in "costs" I'm including not just trading expenses but performance differentials in being in the alternate securities during the wash sale period, underlying expense ratio differentials of those alternate securities, etc.

The $3K cap acts as an effective total cap for those of us (like the MF) who won't have much in the way of capital gains until after the accumulation phase, when earnings become low enough for taxes not to matter (and the carried over tax losses to do no good).

That's why I suspect that in a true apples to apples comparison of a Betterment portfolio with algorithmic TLH to a normal Vanguard portfolio with human-performed TLH, the benefits of Betterment will start to look negligible.  I've made all these same points in the comments to MF's post.

foobar

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Re: Betterment?
« Reply #86 on: September 17, 2014, 07:27:25 AM »
Miles, in "costs" I'm including not just trading expenses but performance differentials in being in the alternate securities during the wash sale period, underlying expense ratio differentials of those alternate securities, etc.

The $3K cap acts as an effective total cap for those of us (like the MF) who won't have much in the way of capital gains until after the accumulation phase, when earnings become low enough for taxes not to matter (and the carried over tax losses to do no good).

That's why I suspect that in a true apples to apples comparison of a Betterment portfolio with algorithmic TLH to a normal Vanguard portfolio with human-performed TLH, the benefits of Betterment will start to look negligible.  I've made all these same points in the comments to MF's post.

That 3k carries over (i.e. so you might have need of it against OI in a some other year) AND it allows you to potentially do some rebalancing tax free if needed.  I will agree that the advantage you get over just tax loss harvesting when the market is down 10% is going to be very small.

milesdividendmd

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Re: Betterment?
« Reply #87 on: September 18, 2014, 02:12:09 PM »
Miles, in "costs" I'm including not just trading expenses but performance differentials in being in the alternate securities during the wash sale period, underlying expense ratio differentials of those alternate securities, etc.

The $3K cap acts as an effective total cap for those of us (like the MF) who won't have much in the way of capital gains until after the accumulation phase, when earnings become low enough for taxes not to matter (and the carried over tax losses to do no good).

That's why I suspect that in a true apples to apples comparison of a Betterment portfolio with algorithmic TLH to a normal Vanguard portfolio with human-performed TLH, the benefits of Betterment will start to look negligible.  I've made all these same points in the comments to MF's post.

If it were possible to know the performance differential of different funds before investing, then noone would ever invest in any fund other than the future best performing fund.  In the end the switches will likely be close to random, and cancel each other out in terms of loss/gain.  TLH+ switches from cheap index ETFs to cheap ETFs so there are really no significant costs to switching in terms of expense ratios.

The benefits of TLH savings will not be any more "negligable" than the effect of switching from an expensive to a cheap index fund.  In other words, if you save 30 basis points a year with TLH, or 30 basis points a year by buying lower cost index funds the effect on your ultimate stash will be identical.


brooklynguy

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Re: Betterment?
« Reply #88 on: September 18, 2014, 03:38:15 PM »
If it were possible to know the performance differential of different funds before investing, then noone would ever invest in any fund other than the future best performing fund.  In the end the switches will likely be close to random, and cancel each other out in terms of loss/gain.  TLH+ switches from cheap index ETFs to cheap ETFs so there are really no significant costs to switching in terms of expense ratios.

The benefits of TLH savings will not be any more "negligable" than the effect of switching from an expensive to a cheap index fund.  In other words, if you save 30 basis points a year with TLH, or 30 basis points a year by buying lower cost index funds the effect on your ultimate stash will be identical.

Yes, I agree the performance differentials should cancel each other out on average.

And I agree that whatever savings you get from TLH are just as good as savings from lower expense ratios (or any other source).

But I question whether those savings will be materially greater than zero for someone in the MF's shoes, who most likely won't benefit from tax loss harvests in excess of $3K.  At a 25% marginal tax rate, Betterment's 0.15% fee completely erases the savings on a portfolio of $500K.

For those of us in the MF's shoes, maybe what makes the most sense is to invest the smallest amount necessary with Betterment to enable algorithmic TLH to achieve $3k of tax loss harvests per year for as long as we have taxable ordinary income (or, alternatively, invest a larger amount and pull out once you have a sufficient harvest to carry-over for every subsequent year that you expect to have taxable ordinary income).  If the numbers that Boris from Betterment provided in MF's post are accurate, it looks like $3k of harvests can be achieved with portfolios of less than $100k (although those numbers are skewed by higher than usual volatility in the two months since the launch of TLH+).  But I'm still not sure if the savings are worth the effort and potential costs; it would be too easy to screw up management of your non-Betterment portfolio to avoid wash sales.  And if we have any market drops significant enough to enable manual TLH at sufficient levels, the benefits of Betterment's TLH+ completely disappear.

milesdividendmd

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Re: Betterment?
« Reply #89 on: September 18, 2014, 03:48:56 PM »
First of all, To pay 3000 in fees on an expense ratio of 0.15% you would have to have two million dollars invested!.  So if you have less than 2 million taxable invested and more than $100,000, and you harvest 3K in TLH then you come out ahead.

Second of all if you have more than 2,000,000 invested in a taxable account at betterment, then you can use TLH amounts in excess of 3000 to counteract the capital gains that you would inevitably have to pay in order to rebalance your portfolio.

Either way, its value added.


brooklynguy

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Re: Betterment?
« Reply #90 on: September 18, 2014, 03:54:03 PM »
No, that's treating the $3k harvest as if it were a tax credit rather than a tax deduction.  If you're in the 25% marginal tax bracket, you would need a portfolio of $500k for the .15% fee to completely offset savings.

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Re: Betterment?
« Reply #91 on: September 18, 2014, 04:00:45 PM »
No, that's treating the $3k harvest as if it were a tax credit rather than a tax deduction.  If you're in the 25% marginal tax bracket, you would need a portfolio of $500k for the .15% fee to completely offset savings.

I think you misunderstand.

What I'm saying is that in order to pay 3000 in fees assuming Betterments assets under management fee of 0.15% you would have to have 2 million invested in betterment.  The marginal rate is irrelevant to this calculation.


EDIT:  I see your point and it is well taken.  At a 25% tax rate a 3000$ deduction would only save you $750 in federal taxes.
« Last Edit: September 18, 2014, 04:52:47 PM by milesdividendmd »

brooklynguy

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Re: Betterment?
« Reply #92 on: September 18, 2014, 07:48:38 PM »
EDIT:  I see your point and it is well taken.  At a 25% tax rate a 3000$ deduction would only save you $750 in federal taxes.

Right.  I'm curious to hear the MF's take on this when he gets around to responding (some of us made these same points in the comments section of his post).

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Re: Betterment?
« Reply #93 on: September 18, 2014, 10:48:45 PM »
EDIT:  I see your point and it is well taken.  At a 25% tax rate a 3000$ deduction would only save you $750 in federal taxes.

Right.  I'm curious to hear the MF's take on this when he gets around to responding (some of us made these same points in the comments section of his post).

But even with a $500,000 portfolio, the fact remains you will need to sell some winners to rebalance yearly  md the resultant long and short term capital gains can be negated by tax losses over 3K.

And by the way betterment's white paper claims an average tax alpha of 1.94% not 0.15 %!  So you can carry forward an awful lot of losses which can offset thousands of dollars of gains in the future.

Would you buy an index with an expense ratio 2% (or even 0.5 %) higher than your current mutual funds?  I know I wouldn't.

brooklynguy

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Re: Betterment?
« Reply #94 on: September 19, 2014, 10:24:55 AM »
But even with a $500,000 portfolio, the fact remains you will need to sell some winners to rebalance yearly  md the resultant long and short term capital gains can be negated by tax losses over 3K.

And by the way betterment's white paper claims an average tax alpha of 1.94% not 0.15 %!  So you can carry forward an awful lot of losses which can offset thousands of dollars of gains in the future.

Would you buy an index with an expense ratio 2% (or even 0.5 %) higher than your current mutual funds?  I know I wouldn't.

I suppose I'm biased by my own particular situation (which I think probably closely mirrors the MF's).  All of my rebalancing occurs inside tax-advantaged accounts, so TLH really can't help me in excess of $3k per year (and may even harm me after FIRE if I'm struggling to find enough income to qualify for ACA tax credits -- or can you simply elect not to use carried-over losses?).  I'm in the 28% bracket, so the most I can save is $840 (not counting state taxes, but I'll ignore that detail for now).  And Betterment's .15% fee would cost me about $450 on the taxable portion of my portfolio.  So the most value I could get is $390 ($840 - $450), and that's only if we continue to have a market environment with so little volatility that I can't manually tax harvest.  If we experience even a modest market correction, I can easily harvest $3k of losses manually (in which case I would be losing $450 of value by using Betterment).  Plus, with Betterment, I would need to manage my tax-advantaged accounts to dovetail with Betterment's TLH+, potentially requiring me to move into more expensive funds in order to avoid wash sales.  It just doesn't seem worth it. 

For the MF, Betterment's referral bonuses probably skew the numbers back in his favor (not to suggest that I believe the referral bonuses are influencing his recommendation; I have the highest regard for his integrity).

milesdividendmd

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Re: Betterment?
« Reply #95 on: September 19, 2014, 10:50:34 AM »
$390 saved on a 300K taxable portfolio (using your numbers) is equivalent to a decrease in your yearly expense ratio on your taxable accounts of 0.13%.

Thats enough to have a significant impact on your portfolio value 20 years from now.

And betterment requires zero rebalancing going forward so in the end it would likely mean less hassle.

brooklynguy

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Re: Betterment?
« Reply #96 on: September 19, 2014, 11:25:06 AM »
It would only be $390 saved each year for a few years until FIRE (not indefinitely), and even then, only if no opportunities arise for manual TLH.  It's just as likely that such opportunities will arise, in which case I will have lost $450 each year on my $300k taxable portfolio (the equivalent of increasing my expense ratio by 0.15%).  And as the portfolio grows, the more Betterment's fee will eat into any savings.

I like having control over my investments, but even putting that aside, the "no hassle" factor of Betterment really only applies if you have all your funds with them and can truly set it and forget it.  Having tax-advantaged accounts outside Betterment that need to be separately managed in light of what's going on inside Betterment, in my view, increases the hassle (besides potentially increasing expenses if you need to move into more expensive funds in order to get the benefit of TLH+).

But I am starting to be convinced that TLH+ alone could make Betterment an optimal choice for someone who is able to take full advantage of the harvested losses (as long as their .15% fee doesn't go up).

Beric01

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Re: Betterment?
« Reply #97 on: September 19, 2014, 12:22:40 PM »
I like having control over my investments, but even putting that aside, the "no hassle" factor of Betterment really only applies if you have all your funds with them and can truly set it and forget it.  Having tax-advantaged accounts outside Betterment that need to be separately managed in light of what's going on inside Betterment, in my view, increases the hassle

Well said. This is exactly my analysis. Betterment for me would increase my work required, ruin my asset allocation across my multiple investment accounts, and also hurt my tax optimization due to differing taxes on various asset classes.

This article is simply not up to caliber compared to MF's previous work. It seems like he just forgot that people also have 401(k)'s (based on his advice!), and that they're not just buying target date funds in them, but specifically funds that benefit from being in a tax-advantaged account, such as bonds!

milesdividendmd

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Re: Betterment?
« Reply #98 on: September 19, 2014, 02:17:29 PM »
It's an excellent article, perfectly in line with his prior work.

It's data driven, logical, and perfectly consistent with his prior goals of increasing take home returns on investments with tax efficiency, asset placement, and withdrawl strategy.

If anything I respect his thinking ability even more because he does not pigeon hole his strategy into overly simplistic "just invest in one vanguard mutual fund," philosophies.

Of course I was a fan of betterment (and MF) for similar reasons long before I ever read this article, so all of what I (and you) just wrote is likely nothing more than confirmation bias!

But the idea that it is more work to invest taxable investments with betterment is, in most cases, pure fantasy.

I enrolled in TLH+ a couple of months ago and had to change exactly none of my retirement account investment elections.  It took about 5 minutes to review the list of betterment funds and make sure that none on my mutual funds were tracking the same indexes.

I will never have to spend another 5 minutes reviewing investments again unless I consider a new workplace fund (which I won't) or if Betterment changes their choice of ETFs (which they probably wont.)

brooklynguy

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Re: Betterment?
« Reply #99 on: September 19, 2014, 02:53:44 PM »
I agree that it is excellent article in line with the exceedingly high standards that MF has set for himself.

Beric01, I'm not sure why you say it seems like he forgot that people have money in tax-advantaged accounts when, as he described in the article, he is structuring his entire strategy around the fact that his portfolio is split between taxable and tax-advantaged accounts (and he is upfront about that fact that moving only taxable accounts to Betterment will require him to monitor his tax-advantaged accounts in light of what's going on inside Betterment).

But, given that (i) I can only effectively make use of $3k of tax losses per year (and only for a few years until FIRE) and (ii) I think there is a relatively high likelihood of being able to manually harvest some or all of those losses, I have not reached the same conclusion as MF that Betterment is the optimal choice (for me).