Wealthfront vs. Betterment - Portfolio Allocation

[Frugal_NYC]

I've been doing some research on where to put an extra $45K (which I will add any extra after-tax funds to over time).  I ran the investor analysis models on both sites and I found the results mildly surprising - they were based on 9+/10 risk tolerance

Wealthfront
35% VTI
22-26% VEA (Foreign)
18-28% VWO (Emerging)
5-10% VIG (Dividend Stock)
5% DJP (Natural Resources)
5% MUB (Bonds)

Betterment (attached)

I guess what was surprising to me was that both of them have International at 45-55% of the portfolio and Wealthfront was weighting VWO higher then VEA if you increased your risk tolerance.

Any concerns with these styles?  I may not go with either but I do need to do something with this money and my current mix is basically this:

S&P 45%
Extended Mkt 15%
International - VTIAX 30%
PIMCO TOTAL RETURN INSTL (PTTRX) 10%

[Interest Compound]

Forgetting about the percentages for a moment, they both have poor allocations, as they are geared towards making people think *investing is hard, look at all these funds we put you in, you need to pay us to take care of this for you!*  One has a dubious value tilt, the other has natural resources and "dividend stock".  I'd stay away from both.

[GGNoob]

Forgetting about the percentages for a moment, they both have poor allocations, as they are geared towards making people think *investing is hard, look at all these funds we put you in, you need to pay us to take care of this for you!*  One has a dubious value tilt, the other has natural resources and "dividend stock".  I'd stay away from both.

Very true.

I use Betterment to invest my monthly "spending" money. My wife spends hers, and I invest mine. Betterment works great for that as I can get a diversified portfolio for as little as $10.

But if you are saving for long term, your best bet will be to just put your money into VTSAX (Vanguard Total Stock Market) and/or VTIAX (Vanguard Total International Stock Market) according to your investment plan to match up with your desired asset allocation.

[tj]

I think Betterment's allocation is fine. Can you do better? Sure. Can you do worse? Sure. I don't like Wealthfront's allocation. Too much Emerging, and I have no need for commodities.

[forummm]

Why don't you just go 50% VTSAX and 50% VTIAX? It's plenty aggressive, incredibly diversified, and in line with the global market cap. It has emerging markets, dividend stocks, REITs, and everything else in it already.

[tj]

Why don't you just go 50% VTSAX and 50% VTIAX? It's plenty aggressive, incredibly diversified, and in line with the global market cap. It has emerging markets, dividend stocks, REITs, and everything else in it already.

Requires rebalancing between the two. 100% VTWSX a better choice for lazy investor. Let the market dictate your domestic/international split.

[forummm]

Why don't you just go 50% VTSAX and 50% VTIAX? It's plenty aggressive, incredibly diversified, and in line with the global market cap. It has emerging markets, dividend stocks, REITs, and everything else in it already.

Requires rebalancing between the two. 100% VTWSX a better choice for lazy investor. Let the market dictate your domestic/international split.

That's another option. But 50/50 is pretty close to the global market cap. If you want to get the exact market cap, it's not too hard. Rebalancing is unlikely to be necessary very often. You could just make new purchases to whichever is lagging. VTWSX has a much higher expense ratio.

[tj]

Why don't you just go 50% VTSAX and 50% VTIAX? It's plenty aggressive, incredibly diversified, and in line with the global market cap. It has emerging markets, dividend stocks, REITs, and everything else in it already.

Requires rebalancing between the two. 100% VTWSX a better choice for lazy investor. Let the market dictate your domestic/international split.

That's another option. But 50/50 is pretty close to the global market cap. If you want to get the exact market cap, it's not too hard. Rebalancing is unlikely to be necessary very often. You could just make new purchases to whichever is lagging. VTWSX has a much higher expense ratio.

The expense ratio of VTWSX is less than the costs of Betterment or Wealthfront.

[forummm]

Why don't you just go 50% VTSAX and 50% VTIAX? It's plenty aggressive, incredibly diversified, and in line with the global market cap. It has emerging markets, dividend stocks, REITs, and everything else in it already.

Requires rebalancing between the two. 100% VTWSX a better choice for lazy investor. Let the market dictate your domestic/international split.

That's another option. But 50/50 is pretty close to the global market cap. If you want to get the exact market cap, it's not too hard. Rebalancing is unlikely to be necessary very often. You could just make new purchases to whichever is lagging. VTWSX has a much higher expense ratio.

The expense ratio of VTWSX is less than the costs of Betterment or Wealthfront.

Yes. I don't recommend Betterment or Wealthfront. I recommend the much cheaper Vanguard funds.

[a1smith]

I think the Betterment AA is fine.  Wealthfront is just doing AA with more categories; here is the Wealthfront Investment Methodology White Paper.  But, it is just as easy (and cheaper) to do something with great AA on your own.  Vanguard has already been mentioned several times; here is what Vanguard recommends and I also mention two "tweaks" you might be interested in.

Using Vanguard's mutual fund asset allocator and answering questions for your risk level you get this:

60%   Vanguard Total Stock Market Index Fund Investor Shares (VTSMX)            (use VTSAX if more than $10K for lower ER, or VTI ETF for low ER with < $10K)
40%   Vanguard Total International Stock Index Fund Investor Shares (VGTSX)    (use VTIAX if more than $10K for lower ER, or VXUS ETF for low ER with < $10K)

Vanguard just recently changed from 70/30 to 60/40.  You can read about it in Bogleheads.  50/50 is recommended by some also, just like forummm did.

Now, a couple of "tweaks" you might consider.  Some people may like them, some people may think they are too much work.  You only need to rebalance occasionally . . . .

If you look up VTIAX on Morningstar you will see an 86.46% developed, 13.54% emerging market ratio.

Right now, emerging markets make up approximately 25% of the non-U.S. global market capitalization.  So, if you want to match the global emerging market cap weighting you can also buy VEMAX or VWO to increase it from 13.54% to 25%.  For VEMAX/VWO there is a 17.12% developed, 82.88% emerging market ratio.

So, to solve for right mix you have two equations, two unknowns.  0.1354x + 0.8288y = 0.25 (or whatever % you want) and x + y = 0.4  (40% of portfolio).  So, for this scenario you buy 60% VTSAX, 28.2% VTIAX, and 11.8% VEMAX.  It's simple math, you can use minverse and mmult functions in a Google sheet to solve simultaneous equations.

Similarly, VTSAX holds 3.79% real estate stocks.  If you want more real estate exposure you can also buy VGSLX or VNQ to increase the % to what you want.

[a1smith]

I may not go with either but I do need to do something with this money and my current mix is basically this:

S&P 45%
Extended Mkt 15%
International - VTIAX 30%
PIMCO TOTAL RETURN INSTL (PTTRX) 10%

A couple of comments about what you currently have - you are basically 90% stock / 10% bond and 67% US / 33% International for stock.

For what you are listing as your risk level the 90/10 ratio seems fine.

This Boglehead article on Extended market index fund explains that a 80% SP500 / 20% extended market mix is the same as VTSAX.

So, what you have is the same as
VTSAX - 56.3%
VEXAX - 3.7%
VTIAX - 30%
PTTRX - 10%

You could simplify this by eliminating extended market fund.  Then adjust VTSAX, VTIAX, (and maybe VEMAX, VGSLX) based on what you decide from above discussions, etc.

[Frugal_NYC]

I may not go with either but I do need to do something with this money and my current mix is basically this:

S&P 45%
Extended Mkt 15%
International - VTIAX 30%
PIMCO TOTAL RETURN INSTL (PTTRX) 10%

A couple of comments about what you currently have - you are basically 90% stock / 10% bond and 67% US / 33% International for stock.

For what you are listing as your risk level the 90/10 ratio seems fine.

This Boglehead article on Extended market index fund explains that a 80% SP500 / 20% extended market mix is the same as VTSAX.

So, what you have is the same as
VTSAX - 56.3%
VEXAX - 3.7%
VTIAX - 30%
PTTRX - 10%

You could simplify this by eliminating extended market fund.  Then adjust VTSAX, VTIAX, (and maybe VEMAX, VGSLX) based on what you decide from above discussions, etc.

I have this allocation because my 401K does not have VTSAX for some reason we have S&P and Extended market, and I just happen to believe Extended will perform a little better so I do 3:1 instead of 4:1

Question
If I want to make sure my holdings are optimized across taxable, 401k and roth ira ... where is it best to hold bond funds and where is it best to hold equity funds or high turnover funds

Do most people optimize across all vehicles or do they try to optimize within each vehicle?

[forummm]

Question
If I want to make sure my holdings are optimized across taxable, 401k and roth ira ... where is it best to hold bond funds and where is it best to hold equity funds or high turnover funds

Do most people optimize across all vehicles or do they try to optimize within each vehicle?

Generally people hold bond funds in tax-advantaged accounts so that you aren't paying taxes on all the dividends. If you have funds that spit off lots of capital gains distributions, you might want to hold those in a tax-advantaged account as well. Vanguard funds do not have capital gains distributions.

Generally people optimize across all their holdings, and not in each account. For example I have certain retirement accounts that have certain funds with a low cost, and I hold those funds there, and other accounts where those funds are slightly more expensive, so I hold something else there. If you need to liquidate some funds for a big purchase, you can sell whatever's in your taxable account and then make a transaction in your tax-advantaged account to bring your asset allocation back into the desired levels. So if you sell equities in the taxable, you might sell some bonds in tax-advantaged to buy equities there.

[a1smith]

Vanguard funds do not have capital gains distributions.

Vanguard funds (at least some) do have capital gains distributions but they are very small and infrequent.

An example from our funds in 2014 is Vanguard Inter-Term Bond Index Adm (VBILX) paid LT cap gain 12/22/2014, 0.062/share.  However, out of the seven Vanguard funds we owned EOY that was the only one that paid a LT or ST cap gain.

[forummm]

Vanguard funds do not have capital gains distributions.

Vanguard funds (at least some) do have capital gains distributions but they are very small and infrequent.

An example from our funds in 2014 is Vanguard Inter-Term Bond Index Adm (VBILX) paid LT cap gain 12/22/2014, 0.062/share.  However, out of the seven Vanguard funds we owned EOY that was the only one that paid a LT or ST cap gain.

Sorry, you're correct. I should have said *most* Vanguard funds. With their dual share fund structure and other tax-efficient techniques they generally eliminate all (for some funds) or a lot (for other funds) of the capital gains distributions. I think all or almost all of their stock funds that have ETFs have no recent capital gains distributions.

More info:
https://investor.vanguard.com/mutual-funds/all-vanguard-funds#distributions  (click on the distributions tab if the link doesn't take you there directly).