Hi all,
Daniel Egan, in charge of Investing at Betterment here.
I just wanted to respond to the math by Thedudeabides. Unfortunately it's not quite right for two reasons.
First, Betterment's fees on a $100,000 portfolio are 15bps, not 35bps.
Second, while you've compounded out 20 years worth of fees, you've only tax loss harvested once. While you may be quite optimistic about markets only going up, thinking that you'd only tax loss harvest in one year out of 20, and only get one year's worth of tax offsets doesn't seem fair.
So, if we do it for just one year, with the correct fees:
No TLH+:
100,000 * (1.07) = $107,000
With TLH+:
100,000 * (1.0685) + $750 = $107,600
So in one year it has raised your after-fee return 60bps.
Obviously, that's a very simple case, and doesn't include growth while deferred, nor final liquidation tax. We take these concerns seriously, and thus did the correct analysis over the most recent 13 year period using the portfolio's internal rate of return with and without TLH to properly adjust for cashflows. You can find that detailed analysis here:
https://www.betterment.com/resources/tax-loss-harvesting-white-paper/#alpha
We found that for a moderate rate tax payer, TLH+ increases returns by 0.77% per year, after deducting Betterment's fees.
Glad to see the discussion ongoing, and happy to answer any other questions.
Kind regards,
Dan
Hi Dan,
Thank you for responding. I really appreciate your participation in the discussion.
The difference in fees certainly makes a big difference, and you're right about the $750 each year (I did this on my financial calculator initially and then did not write out the right formula when writing the post), but I'm still not convinced it changes my conclusion.
No TLH:
$100,000 * (1.07)^20 = $403,873
When Sold:
Basis = $100,000
Gain = $303,873
LTCG @ 15% = $303,873 * 0.15 = $45,580.95
Net = $403,873 - $45,580.95 = $358,292.93
TLH:
$100,000 * (1.0685)^20 = $376,262
$750 each year for 19 years @ 1.0685 = $30,248
Total = $406,509.68
So far, we're ahead with TLH, but if taxes are taken into consideration, this is where it starts to become less of an advantage. Let's say that during the first year (I know this is completely contrived), the market falls by 60% at one point. The $100,000 stock is now worth $40,000. Shares are repurchased and the market recovers at the end of the year to end at $106,850.00. There are $60,000 losses harvested, $3000 of which are used in the current tax year and the remainder of the $57,000 carried forward.
At the end of the 20 years:
Basis = $40,000
Gain = $406,509.68 - $40,000 = $366,509.68
LTCG = $366,509.68 * 0.15 = $54,976.45
Net = $406,509.68 - $54,976.45 = $351,533.23
Taking taxes at the time of sale into consideration, in this scenario you are behind $6,759.09 if taxes stay the same.
If taxes rates rise, the difference would be greater (for example if capital gains taxes were to be 28%).
Am I thinking about this correctly?