The Money Mustache Community

Learning, Sharing, and Teaching => Investor Alley => Topic started by: TwistedEther on September 18, 2018, 03:15:53 PM

Title: Is tax loss harvesting enough to cover robo advisor fees, compared to Vanguard?
Post by: TwistedEther on September 18, 2018, 03:15:53 PM
Hi Folks. I would love your inputs on this small dilemma I have.

Let's say I have $50K to invest.  I am thinking of either going with Vanguard or just being lazy and giving my money to the robo advisors (Betterment or Wealthfront, haven't figured out which one yet).  I know that Betterment and WF do tax loss harvesting automatically.  Would the savings from the harvesting be enough to cover their yearly fees (Roughly $120 per year for $50K)?  Or is it not worth it, and should I just go with Vanguard?
Title: Re: Is tax loss harvesting enough to cover robo advisor fees, compared to Vanguard?
Post by: not_a_trex on September 18, 2018, 03:43:09 PM
I would like start by pointing out that you can do tax loss harvesting (TLH) at Vanguard. It's not a unique feature of robo-investors.

Back to your original question, if you were to dump 50K into an account (I'm assuming this is all money not in a tax-advantaged account such as a 401K or IRA. You can't benefit from TLH in a retirement account), you may outperform the fees associated with the robot investor.

But I would be cautious of this assessment because the value of TLH relative to the fee diminishes as your account grows. Over time, as your stock/find/ETF grows in value it becomes more unlikely for you to be able to TLH that particular share. EG, if you bought a share of VTSAX ten years ago and its value has since doubled, you would need that mutual fund to drop in value by half before you could consider TLH that share. So since the market in general goes up over long periods of time, you can usually only take advantage of TLH with recent purchases.

With that in mind, your robo-advisor fee is a fee of your ENTIRE account, including shares you bought 20 years ago that you likely can't TLH. So to keep up it would have to do a better and better job at TLH your recent purchases.

Personally, I do not believe TLH alone is a reason to get a robot investor. It's not that difficult to begin with if you DIY, maybe taking a few minutes of work each year to do.
Title: Re: Is tax loss harvesting enough to cover robo advisor fees, compared to Vanguard?
Post by: shinn497 on September 18, 2018, 07:20:49 PM
You can do TLH on your own. The question isn't if its enough to cover the fee. The question is is the fee worth the extra convenience of having it automated.

Anyway TLH is at its best under the following conditions:

 - You make regular large contributions, like every paycheck. This means you are continually taking positions that could experience a harvestable loss.
 - You have a higher marginal tax bracket. Tax loss harvesting taxes money that would have been taxed at a marginal rate and taxes it at a LTCG rate. This makes a lot more sense when your marginal tax rate is high.
 - You are investing for the long term, and intend to have a higher investment balance. More time to recover from your temporary losses. More time to reap the benefits of your tax savings as capital gains
 - You intend on reinvesting the saved money from your harvested losses. The reasoning is obvious but this compounds (literally) the effect of saved money from TLH. In fact, if you can get your yearly TLH gains to like 175k, you will have completely nullified the fee of most robo advisors
 - Bonus: You have something else to deduct your tax losses from other than your ordinary income. An example would be an investment property that appreciates. The biggest drawback of TLH is that you can only deduct 3k per year from ordinary income. You can saved harvested losses and deduct those from capital appreciation of other things, however (including investments).

I think one of the biggest reasons a lot of people here are anti robo and anti TLH is they are closer to leanFIRE, which I don't think benefits TLH at all. The reason being is that it is highly sentitive to the safe withdrawal rate, and thus highly sensitive to fees. IT has a shorter accumulation phase. And potentially can be accomplished in a lower tax bracket.

Personally I am not exactly lean but not exactly FAT (who tf am I going to know). But I strongly beleive in behavioural economics and robo advisors cater to that, which is why I go with them. I'm not saying they are right for everyone. But I would recommend them for people that want to have their investments as "turnkey" as possible. They are like target date funds on steroids.