Author Topic: Where should I invest $100K (taxable)? Betterment, Vanguard or something else?  (Read 3379 times)

greenjb

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I'm a moderately informed investor, fairly new to MMM (but utterly hooked). I just inherited $100K. I was trying to decide between Betterment (.15 fee) or Wealthfront (.25 but direct indexing, too). But after reading the long, interesting comment thread on MMM's Betterment post, I thought I'd ask for advice here. I'm tempted by Betterment's ease of use, and will be donating to this account consistently, so I can expect an ongoing benefit from TLH....but I lot of smart readers seem to swear by Vanguard, which I'm not familiar with. So, if you were me, what would you do with this money?**

Thanks in advance for any advice

**I max out 401k annually and earn too much to contribute to an IRA, so I don't think I can tax-shelter it

Vilgan

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TLH advantages are fairly overblown. Its super easy to do yourself, in many cases it isn't actually saving you money in the long haul, and since the market naturally rises the TLH opportunities on the original amount disappear entirely but you are still paying the fee.

Betterment is fine since .15% is a pretty reasonable amount and then you can offload any thinking about asset allocation, movements, rebalancing, etc to them. I would never pay it, but I've spent a good amount of time reading and understanding the market and would prefer to avoid paying any additional fee. So my choice would personally be Vanguard but Betterment is great too and I would recommend them to many friends.

greenjb

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Thanks Vilgan. I've been reading various threads here since I posted last night and am truly on the fence about TLH -- on the one hand, I get that the TLH benefit disappears when the market rises. But on the other hand, I'm also planning to contribute to this account monthly for the next 20+ years...so it seems like I would get a steady (though small) TLH benefit at least for the new money I contribute, no? But I'm wondering if over the long term I wouldn't be better off with the Vanguard LifeStrategy Growth Fund that would have lower fees than Betterment. Does anyone have any advice on this? If I go with Vanguard is the LifeStrategy Growth Fund (80/20) my best bet, or is there some allocation I could make with lower fees? I'm in my early 40s, so this investment is purely for long-term growth...  Thanks everybody, this forum is really invaluable -- and fun.

dandarc

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Life strategy fees = weighted average of 4 funds investor shares fees.

You can save a few points by doing a 3 or 4 fund portfolio and rebalancing yourself.  Ex - I switched my accounts to a 3 fund portfolio that is 80/20 - Total Stock 55%, Total International 25%, Total Bond 20%.  Personally not sold on needing 4% or whatever in international bonds.  Not exactly what I'd get with LifeStrategy Growth, but pretty close and cheaper.  Once all funds are admiral, fees on my portfolio will be about .07% vs .16% or so on the LifeStrategy fund.

greenjb

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Thanks, dandarc -- much appreciated. I need to spend some time on Vanguard's site; I'm not familiar with "admiral" funds...but rebalancing 3 funds annually (it is annually, yes?) seems like something I can handle.

dandarc

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I'm doing it annually - the benefits of rebalancing more frequently than that are somewhat dubious.  Collins rebalances annually or if the market swings by more than 20%, according to his book.

Speaking of Collins - if you haven't yet, read the Stock Series (or his book, which is the stock-series in a somewhat more approachable format):

http://jlcollinsnh.com/stock-series/

greenjb

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This is really great stuff -- thank you. I stayed up FAR too late reading all his chapters. But I think the two of you have convinced me to go with Vanguard over Betterment, and even to forego the LifeStrategy growth fund and just put together three funds myself in order to save on fees. Dandarc, what are the 3 Vanguard admiral funds you're in? VTSAX (55%), VTIAX (25%) and and VBTLX (20%)? And then what do you do, just check in after a year and rebalance a bit if things are out of proportion? One more point that I'd love thoughts/advice on: I'm going to be contributing probably $5K a month for most months of the year -- it'd probably be a lot easier to just do LifeStrategy (Growth) than to try to split up that contribution between three or four funds **every month** wouldn't it? Or am I just being lazy :)

dandarc

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All I can tell you is what I do - you need to decide for yourself how to handle your investments.  You'll be much more likely to stay the course when needed if you've carefully considered the decisions and understand why you own what you own.

What you are developing in this thread is your investment policy statement - IPS - the rules so that when you have money to invest, you don't have to think about it - just do what the IPS says to do.  Write em down.  Having written rules helps you keep yourself out of the way of your results.

My investment policy statement says I rebalance on my birthday if anything is at least 10% off from target allocation - for example, if say Total bond, who's target is 20% is below 18% or above 22% on my birthday, then I rebalance the account.  If instead of 55/25/20, I'm at 57/23/20 I don't rebalance.  If it is 60/25/15, I would rebalance.

As far as additions, I personally just buy in my 55/25/20 ratio.  Simple for me, and puts a little pressure towards keeping the target allocation.  Some people combine purchasing and rebalancing - if one of your funds is lower than its target, your addition would be tilted towards that fund.

catccc

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Fan of Vanguard here.  I have TLH once and it was fun and I felt quite smart, but your situation needs to be in such narrow parameters to benefit.  For instance, my tax rate on capital gains is 0%, so my TLH losses were only useful to me to the extent I could take capital losses against ordinary income.  That was up to $3K, and my top tax bracket was 15%.  So the max savings was $450.  Not too shabby for a couple of quick transactions, but not like groundbreaking savings, either.

Admiral shares are just a type of Vanguard share with lower expense ratios that you can buy if you invest over a certain amount.  I think it is $10K for most funds, but more for actively managed funds and sector specific funds.

I also advocate an Investment Policy Statement, except I don't really have one myself, yet.  Gotta get on top of that.  For now I invest according to my asset allocation, which is a little screwy because I don't really have an overall allocation, but more like allocations for different classes of investments-  my taxable accounts are more conservative than my retirement accounts.  And then I have a load of cash sitting around.  So I like to think I'm pretty agressive, but if I were to look at my overall allocation, it would be more conservative than it seems to me.  If that makes any sense.  As for rebalancing, I check it sporadically, maybe a 2-3 times a year.

kitkat

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**snip**

 I'm going to be contributing probably $5K a month for most months of the year -- it'd probably be a lot easier to just do LifeStrategy (Growth) than to try to split up that contribution between three or four funds **every month** wouldn't it? Or am I just being lazy :)

When you set up automatic investing on Vanguard, you can have the transfer go into multiple funds. So you can set up a single monthly transaction that puts $2750 in fund A, 1250 in fund B, and 1000 in fund C. Would that help this question?

greenjb

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In theory, that would help (thanks), but my income/expenses are a bit variable, so I probably wouldn't want to do it automatically. But having given this some thought, if I only own three Vanguard funds, we're not talking difficult math to allot the correct amount (it'd never really change if I'm depositing the same sum, either). Also, doing it manually would give me an easy way to rebalance without selling funds and incurring capital gains taxes -- just add a little extra money to whatever fund(s) is underweighted. But thanks to everyone for helping me think this through. Now if I could only decide whether Traditional 401(K) or Roth 401(k) is the better match for me... :)

I guess that's the next step on my MMM financial-makeover journey.

Will

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In theory, that would help (thanks), but my income/expenses are a bit variable, so I probably wouldn't want to do it automatically. But having given this some thought, if I only own three Vanguard funds, we're not talking difficult math to allot the correct amount (it'd never really change if I'm depositing the same sum, either). Also, doing it manually would give me an easy way to rebalance without selling funds and incurring capital gains taxes -- just add a little extra money to whatever fund(s) is underweighted. But thanks to everyone for helping me think this through. Now if I could only decide whether Traditional 401(K) or Roth 401(k) is the better match for me... :)

I guess that's the next step on my MMM financial-makeover journey.

Check this out:  http://www.madfientist.com/traditional-ira-vs-roth-ira/