How Much International Stocks In Your Portfolio? 2017 Outlook

globeHere are some updated thoughts on holding stocks based outside the US in your portfolio.

There is no “ideal” amount of international stocks that experts agree upon. You have numbers ranging from 0% (US only) to 50% (market-cap weighting). For a good summary of this situation, check out these two recent articles from Christine Benz and John Rekenthaler of Morningstar.

The world continues to change, and the market weights will change with it. Here’s an interesting infographic by Jeff Desjardins at VisualCapitalist about world GDP breakdown for the last 2,000 years. The time axis is kind of wonky from 1-1900, so I’d focus on just 1900-now. GDP is not the same as market value, but the point is that the world will not look the same in 30 years.

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Right now, in terms of valuation, US stocks are relatively expensive and International stocks are relatively cheap. Via this ETFTrends article by Chris Konstantinos at RiverFront Investment Group, via TRB:

Looking a 12-month forward P/E ratio at the MSCI All-Country World Ex-US index, we are currently at the largest valuation gap between US and non-US markets in the 15+ years of data to which we have access.

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My take: Pick a split and stick with it. I don’t feel too strongly about this topic. If a Belgian company buys Budweiser, does that change how the business works fundamentally? If you go with 100% US stock and wait 30 years, you’ll probably be just fine. If you go with 50% US and 50% International and wait 30 years, you’ll probably be just fine. One choice will do better than the other, but nobody knows which one. These days I’ll be happy if we manage to avoid nuclear war.

I personally like buying a bigger haystack with all the needles and thus I like 50/50. If you want to hedge somewhere in between, consider that Vanguard Target and Lifecycle All-In-One funds are 60/40 now but they used to be 80/20 and then 70/30. It’s more important that you pick something and stick with it, as opposed to bailing out when one does a lot better than the other.

In terms of psychology, you can always twist the situation as needed. If you are 100% US, you could be happy with US outperformance over the last decade. If you are 50/50, you can take solace in the valuation gap and that any mean reversion from this point onwards will lead to future international outperformance.

Municipal Bonds vs. Treasury Bonds Yield Gap: Liquidity Risk

riskIn my personal portfolio, I’ve been investing in tax-exempt municipal bonds instead of treasury bonds due to their higher taxable-equivalent yields. If you’ve done the same, you may be interested to know that Larry Swedroe at Advisor Perspectives argues that the reason for this yield spread is not credit risk, but liquidity risk.

After the first month or so following issuance, most municipal bonds tend to trade very infrequently, perhaps once a month or even less frequently. Thus, they are illiquid. Since the financial crisis, banks have dramatically reduced assets committed to their bond-trading activities, decreasing liquidity in the municipal bond market. It shouldn’t be a surprise, then, that liquidity premiums have widened. The result is that municipal bond yields are higher than they would have been if liquidity had not been reduced.

Many investors can bear liquidity risk, because they buy individual bonds with the intent of holding them to maturity. For them liquidity is not a major risk, at least in some portion of their portfolio; the reduced liquidity in the market makes municipal bonds more attractive.

The spread itself has been narrowing, according the chart below tracking the ratio of AAA-rated GO Muni bonds to Treasuries over the last 12 months (not adjusted for taxes). Taken from the most recent Baird’s weekly muni commentary.

muni_ust_1708

Still, muni bond funds remain relatively attractive for many folks, especially in higher tax brackets. Use this Vanguard taxable-equivalent yield calculator and compare the numbers for your own situation.

Bottom line. My takeaway is that muni investors should acknowledge this liquidity risk, and be prepared for short-term swings in muni bond fund prices (due to illiquidity) if there is a major event (like a surprise bankruptcy filing). However, if you are truly a long-term holder of muni bonds, then you can accept this risk, hopefully ride things out, and be compensated with higher tax-equivalent yields.

Tough Times for Conservative Income Investors

JP Morgan Asset Management recently released the Q3 2017 update to their Guide to the Markets, which is another of those resources worth bookmarking for future updates. Some folks put a lot of time and energy into it, and it contains a lot of interesting charts and graphs. Here’s just one that caught my eye.

I consider myself a relatively conservative income-oriented investor, and this chart shows why it’s been a tough several years to be that type of investor. For much of the last 30+ years, you could have put your hard-earned money in an FDIC-insured certificate of deposit and enjoyed a guaranteed return above inflation. This isn’t even when shopping around for the top rates, just taking the average bank CD rates.

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Nowadays, you’re just trying to keep the bleeding to a minimum, jumping at the chance to grab a 3% APY long-term CD that might just keep up with inflation.

This also partially explains why the stock market keeps going up and up. Which would you rather have?

  • FDIC-insured cash savings that gives you $1 in annual interest per $100 invested, or a
  • S&P 500 ETF with a 4% earnings yield and 2% dividend yield? In other words, a basket of companies that for every $100 invested earns $4 a year in profit and out of that gives you $2 a year in cash dividends?

I really can’t complain as my overall portfolio of stocks, bonds, and bank CDs has more than doubled in the past several years. Yet, I also share that vague feeling of uneasiness with many other investors.

Solo 401k – Best Retirement Plan for Self-Employed Business Owners

solo401kThe wealth management group Del Monte published a whitepaper on Solo 401k plans, calling it the “financial industry’s best kept secret” and a “powerful and underutilized” retirement plan for self-employed business owners. The 4-page PDF does a good job at summarizing the benefits of a Solo 401k, aka Self-Employed 401k. Perhaps most importantly, the Solo 401k allows the maximum annual tax-sheltered contribution (or ties for the max) for all income levels and ages.

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Here’a a quick benefit comparison against the SEP-IRA and SIMPLE IRA:

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The key difference is the Solo 401k allows an $18,000 salary deferral at any income (i.e. if you make $18k or under, you can put aside all of it) for 2017 and then adds on a profit-sharing component. In addition, Solo 401ks a larger additional “catch-up” contributions at age 50.

I’ve had a Self-Employed 401k through Fidelity for several years, and I have been quite happy with it. The paperwork has been minimal, although you must start filing IRS Form 5500-EZ once your asset exceed $250,000 or face significant penalties. (It’s one page long.) It has been quite flexible – I am able to purchase mutual funds, ETFs, individual stocks, CDs, and individual Treasury and TIPS bonds. There is no annual fee and I’ve only had to pay trade commissions. Fidelity also accepts rollovers from outside IRAs and 401k plans.

Vanguard, Schwab, and TD Ameritrade also offer cheap in-house Solo 401k plans that work well for low-cost DIY investors. There are now several independent providers with “custom” 401k plans which can offer features like 401k loans the ability to invest in alternative asset classes (precious metals, tax liens, real estate, private equity, etc.) at additional cost. Vanguard and TD Ameritrade offer a Roth option; Fidelity and Schwab are only available with “traditional” pre-tax contributions.

Another option to consider is the Solo Defined-Benefit Plan, or “Solo Pension”. The annual maintenance fees are higher and the IRA requirements are significantly more complex, but you can make much larger amounts of tax-deferred contributions (dependent on age and income). The most affordable option appears to be the Schwab Defined-Benefit Plan. If anyone has any experience with this plan, I’d like to hear about it and would be open to a guest post.

Wealthfront Review 2017: Feature Breakdown and Comparison

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(Updated August 2017. Added details about Advanced Indexing (smart beta), portfolio line of credit (lower rates than HELOC), customized company stock sales, and 529 college saving guidance.)

Wealthfront is one of the largest independent digital advisory firms (i.e. not tied to a specific brand of funds like Vanguard or Schwab). With a younger target audience (20s to 40s), their offering is for folks that are comfortable having nearly all interactions via smartphone or website. They frequently announce new features and improvements, so I will work to keep this feature list updated.

Diversified portfolio of high-quality, low-cost ETFs. Their portfolios are a diversified mix of several asset classes including: US Total, US Dividend, International Developed, US Corporate Bonds, Muni Bonds, Emerging Market Bonds, REITs, and Natural Resources. For the most part, low-cost Vanguard and iShares ETFs are used. You could argue the finer points of a specific portfolio, but overall it is backed by academic research (Chief Investment Officer is Burton Malkiel).

Direct indexing. If your account is over $100,000, Wealthfront will buy all the stocks in the S&P 500 individually and commission-free. ETF expense ratios are pretty low now, so this is mostly used as an opportunity for more tax-loss harvesting. No other robo-advisor offers this feature. Here is whitepaper that details their position. As long as you meet the $100k minimum, there is no additional cost fee above the standard management fee.

Smart-beta. If your account is over $500,000, Wealthfront created Advanced Indexing as their answer to “smart-beta” investing. It works within its Direct Indexing feature in order to improve tax efficiency. As long as you meet the $500k minimum, there is no additional cost fee above the standard management fee.

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Financial planning software with outside account integration. Path is Wealthfront’s new financial planning software, launched in February 2017. This service links your external accounts from other banks, brokerages, and 401k plans (similar to Mint and Personal Capital) in order to see your entire picture without having to manually input your balances and transactions. How much do I have invested elsewhere? How much am I spending? How much am I saving? How much can I spend in retirement?

Path can forecast your saving rate using the last 12 months of transactions. Investment returns are estimated using Monte Carlo analysis. It also accounts for your household income, birthdate, and chosen retirement age to estimate how Social Security will affect your retirement income needs. You can change up the variables and see how it will affect your retirement outlook.

College Savings Planning. You can select a college for real-time expense projections, get a customized estimate of financial aid, and receive a personalized college savings plan to cover the difference. This works with or without their own Wealthfront 529 College Savings account.

Account types. Wealthfront now supports taxable joint accounts, trust accounts, 401k rollovers, Traditional IRAs, Roth IRAs, and SEP IRAs. They also offer a 529 College Savings account.

Tax-sensitive account transfers. This is good news if you already have an existing portfolio with unrealized capital gains. Other robo-advisors may have a “switch calculator” to help you decide whether to move over or not, but Wealthfront will actually accept your existing investments and manage it for you alongside your new investments.

If you want to switch advisors or move your brokerage holdings into a diversified portfolio, you typically have to sell all your holdings and move in cash. This means you will more than likely have a large tax bill. Instead of selling your holdings, Wealthfront will directly transfer them into a diversified portfolio tax efficiently, saving you that tax bill.

Tax-efficent asset location. They will place different asset classes in your taxable accounts vs. tax-deferred accounts (IRAs, 401ks) for a higher after-tax return. However, they do not treat them holistically (i.e. putting all one of one asset in IRA and none in taxable). Non-Wealthfront accounts are also not taken into consideration.

Use dividends and new contributions to rebalance. They will use your dividends and new contributions to rebalance your asset classes in order to minimize sells and thus minimize capital gains.

Concentrated holding of a single stock? Wealthfront caters to the tech start-up crowd with a unique Selling Plan service for people with much of their net worth tied up in a single stock. They’ll help you sell your positions gradually in a tax-efficent manner. Currently available to shareholders of: Alphabet, Amazon, Apple, Arista Networks, Box, Facebook, Pure Storage, Square, Twilio, Twitter, Yelp, Zillow.

Daily tax-loss harvesting. Wealthfront software monitors your holdings daily and attempts to find opportunities to harvest tax losses by switching between “similar but not substantially identical” ETFs. If you can delay paying taxes and reinvest them, this can result in a greater after-tax return. The exact “tax alpha” of this practice depends on multiple factors like portfolio size and tax brackets. You can read the Wealthfront side of things in this whitepaper and Schwab comparison. Here is an outside viewpoint arguing for more conservative estimates.

My opinion is that there is long-term value in tax-loss harvesting and especially daily monitoring to capture more losses. However, I also think it’s wise to use a conservative assumption as to the size of that value. (DIY investors can perform their own tax-loss harvesting as well on a less-frequent basis. I do it myself, but it’s rather tedious and I’m definitely not doing it more often than once a year. I would gladly leave it to the bots if it was cheap enough.)

Portfolio Line of Credit. If your taxable balance is over $100,000, Wealthfront will automatically give you a line of credit of up to 30% of your balance. There is no application, no fees, low interest rates, and you can get cash in as little as 1 business day. The rates are advertised to be even lower than a Home Equity Line of Credit (HELOC). Keep your loan balances modest though, as this is a margin lending product and they may force you to sell your investments if your outstanding balance exceeds your available margin.

Fee schedule. The fee schedule for Wealthfront is simple – Everyone gets charged a flat advisory fee of 0.25% of assets annually (first $10,000 waived). All of the features listed above are included. As your asset size increases, you get access to some additional features like Direct Indexing and Advanced Indexing (Smart-Beta).

Bottom line. Wealthfront is an independent digital advisory firm with over $7 billion in assets. Independent which means they aren’t tied to any specific brand of funds like Vanguard, Fidelity, or Schwab. Their main differentiators from the other independent firms (see my Betterment review) are (1) Direct Indexing and Advanced (Smart-Beta) Indexing portfolio management for optimal tax-efficiency and (2) customized assistance with transferring in your existing investments (including company stock) and then selling them tax-efficiently. Other notable features include: Financial planning software that incorporates external accounts, tax-loss harvesting, 529 college saving plan and guidance software, and a portfolio line-of-credit.

Special offer. Open a Wealthfront account via my invite link and get your first $15,000 managed for free, forever. This is an additional $5,000 above the standard $10,000 balance waiver. You can then invite your own friends for more savings (your friend gets $15k managed free as well, and you get another $5k managed for free.)

Active vs. Passive Funds Debate: Don’t Worry, Be Happy

mrworryA common theme in the financial media these days is that “index funds will take over the world armageddon gaaaaahhhh”. People have already used the “bubble” label. Here’s an example of how three charts on the same topic can suggest very different things. First, you’ve probably seen charts like this that encourage you to extrapolate the current upward trend forever…

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How about some context? Yes, passive funds are gaining assets, but there is still a ton of money in active funds:

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Now, what if things are more cyclical? You know, stuff that goes both up and down? Here’s a chart from the Longleaf 2017 Q2 Shareholder letter:

activefund2

The active/passive debate is not new. As the chart [above] shows, performance runs in cycles, and active management is at a low point today. Late in the passive cycle, active investing typically has been declared dead. That declaration has been followed by a strong active management comeback with corresponding disappointment for those who capitulated and owned the index, particularly at its most inflated levels.

In the end, shouldn’t there be a balance? If things get too wacky, then the active stock managers should eventually have easy-pickins and make lots of money on the “dumb” indexers. My guess is that when the market goes down, active funds will get some of their mojo back. Overall, this topic remains in my “not gonna worry about it” folder.

Longleaf Partners Funds Shareholder Letters

unconventional180One of the early books that impacted my investing philosophy was Unconventional Success: A Fundamental Approach to Personal Investment by David Swensen. As a very successful manager of the Yale Endowment, he offered common-sense explanations of why low-costs are good and which core asset classes make the most sense to own.

In addition, he pointed out the characteristics to look for in successful active management:

  • Hold a limited number of stocks. Bet boldly on fewer companies (high “active share”), as opposed to being a “closet index fund”.
  • High rate of internal investment. The managers should have a high percentage of their own net worth in the same funds that they ask you to invest in. They should “eat their own cooking.”
  • Limit assets under management. If there is more money flowing in than they can invest efficiently, they should close the fund to avoid asset bloat. This requires them to turn down more money!
  • Reasonable management fees. Active management hash higher internal costs than a passive strategy, but you can still charge less than average.

Swensen pointed out Southeastern Asset Management as an example of a company that most clearly displayed all of these characteristics, but don’t miss the last part of the quote:

Southeastern Asset Management (sponsor of the Longleaf Partners mutual-fund family) exemplifies every fundamentally important, investor-friendly characteristic conducive to active-management success. Portfolio managers exhibit the courage to hold concentrated portfolios, to commit substantial funds side by side with shareholders, to limit assets under management, to show sensitivity to tax consequence, to set fees at reasonable levels, and to shut down funds in the face of diminished investment opportunity.

Even though all the signs point in the right direction, investors still face a host of uncertainties regarding Southeastern’s future active-management success.

Due to this recommendation, I try to keep up with the Longleaf Funds shareholder letters. (You can register for free e-mail updates, even if you don’t own their funds.)

Reading the shareholder letters helps illustrate the many difficulties of active management. Here’s how most of their shareholder letters go, along with specific commentary on individual stocks.

  • Our Partners Fund only holds these 15-25 stocks. Our performance has been [x.xx%]. We have done [better/worse] than our benchmarks.
  • We continue to believe we will generate alpha in the future because we only companies at a significant discount to our conservative appraisals.
  • We claim no ability to predict short-term market moves.
  • We believe that our bottom-up intrinsic value investing approach has positioned the Funds with less risk of permanent capital loss than the relevant indices across all of our strategies.

Their flagship Longleaf Partners Fund (LLPFX) has had attractive performance if you look from inception in 1987:

longleaf1987

However, what if you read Swensen’s book when it was popular in 2005 and thought… I should buy some of that! You would have fallen far behind a simple S&P 500 index fund.

longleaf2005

Here’s what Morningstar has to say about it:

Although Longleaf Partners’ 2016 rebound was welcome, past missteps continue to drag down its record and raise concerns about its prospects.

Longleaf again closed their flagship Longleaf Partners Fund (LLPFX) to new investors in June 2017. Their Small Cap fund has been closed to new investors since 1997. This shows that they are still holding true to the positive characteristics listed above. They could make more money by staying open, but they aren’t. Here’s a snippet from their 2017 Q2 Shareholder letter:

The eight-plus year bull market in the U.S. has made finding qualifying opportunities more difficult, particularly in larger cap companies. In addition, this year’s strong returns in most markets outside of the U.S. have made our on-deck list of prospective investments light around the world. Because we have sold and trimmed businesses whose prices have moved closer to our appraisals, our cash reserves are higher than normal. In June, we closed the Longleaf Partners Fund due to limited new investments and a high cash position.

I respect Southeastern Asset Management and I enjoy reading their shareholder letters. They might end up kicking butt in the future. However, I hold no position on any Longleaf funds because I don’t have the level of faith required to maintain my position. It’s a tough world out there, even when you are doing the “right” things. Note that LLPFX charges 0.95% of assets and multiple large-cap index funds only charge 0.05%. Consider that as of this writing, the trailing 15-year total return of LLPFX is 7.12% annualized. The trailing 15-year total return of the S&P 500 is 9.58% annualized. If you held this in a taxable account, the gap would be even wider.

Bottom line. Longleaf Partners Fund continues to be an example of promising characteristics for an investor-friendly, actively-managed mutual fund. However, their recent performance has still been questionable. They may outperform in the future, but will you stick around to see? Reading their free shareholder letters is a good way to learn about what it’s like to invest in a traditional value-oriented, actively-managed strategy.

Free Collection of Investing Books by Meb Faber

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Free again. Asset manager Meb Faber is promoting the launch of his new book, The Best Investment Writing: Selected writing from leading investors and authors (Vol. 1), by making all four previous self-published books free in Kindle format for a limited time (ends Saturday 8/5). Below are direct links to each book. Check first that the Kindle price is $0 (“0.00 to Buy”), then buy it to own permanently. Do not click “Read for Free”.

Grab them now while they are free, and read later at your convenience. You can read Kindle eBooks on smartphones or on any computer via web browser.

I enjoy reading these books, but I’m always careful when reading about finely-diced backtested strategies that worked well in the past. Before you put your hard-earned money at risk, please realize that even if they continue to work (which is in no way guaranteed given how markets tend to weed out edges), they will still be hard to stick to in real life. At some time, you will underperform other strategies for an extended period of time. You must ride out those low periods in order to achieve any sort of market-beating returns. In my opinion, the fancier the strategy, the harder it is to keep faith.

Most Underfunded Private Pension Plans in the S&P 500 (Infographic)

In addition to data on underfunded state pension funds, Bloomberg also has an infographic on private pensions: S&P 500’s Biggest Pension Plans Face $382 Billion Funding Gap. There are at least 20 large corporations that have put aside less than 70% of what they need to pay out their estimated pension obligations. This is even worse than many state governments, which at least have the ability to increase taxes. Here’s the full list along with their specific funding ratios:

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United Airlines was the largest private pension default in US history. I must admit, I don’t really understand the laws behind private pension obligations. In 2002, United Airlines filed for Chapter 11 bankruptcy. In 2005, a federal bankruptcy judge ruled that United Airlines could default their pension obligations and turn the management of pensions over to the Pension Benefit Guaranty Corporation (PBGC). According to this NYT article, the total shortfall was estimated to be $9.8 billion. Even after the PBGC put up $7.3 billion, this still resulted in a significant cut in promised benefits to many retired workers.

Here’s United’s stock price since emerging from bankruptcy in 2006 (via Google Finance):

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Yet today, I still see United Airlines on this list at 64% funded. I suppose these are Continental Airlines pensions due to their 2010 merger. American Airlines is also on this list at 58% funded (they also tried to dump their pensions back in 2012). I hope these airlines shores up their pension funds while their stock prices are reaching new highs.

The PBGC has never required taxpayer money and is normally funded by insurance premiums, but it could require a bailout if future pension defaults exhaust PBGC funds. I wonder what kind of future return figures are used in these estimates. If they are too optimistic, the situation could be worse than pictured above.

Fidelity Index Mutual Fund and ETF Expense Ratios (Updated August 2017)

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Updated. Fidelity announced another round of expense ratio cuts effective August 1, 2017. They last announced a big round of expense ratio drops in July 2016. This move allows them to make the following claim:

Fidelity beats Vanguard on expenses on 17 of 17 comparable stock and bond index funds and 11 of 11 comparable sector ETFs. Comparisons based on fund expense ratios only.

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Mutual Fund Share Classes. Fidelity separates mutual funds into Investor Class ($2,500 minimum) and Premium Class ($10,000). Individual ivestors in employer retirement plans may have access to these funds, including institutional share classes, without the minimums. This is in close alignment with Vanguard Investor and Admiral share classes.

Highlights. Here are some broad US and Domestic index funds that I track.

  • Fidelity 500 Index Fund. Investor 0.09% Premium 0.035%
  • Fidelity Total Market Index Fund. Investor 0.09% Premium 0.035%
  • Fidelity (Developed) International Index Fund. Investor 0.16% Premium 0.06%
  • Fidelity Global ex U.S. Index Fund Investor 0.17% Premium 0.10%
  • Fidelity Total International Index Fund Investor 0.17% Premium 0.10%
  • Fidelity Emerging Markets Index Fund Investor 0.29% Premium 0.13%
  • Fidelity U.S. Bond Index Fund Investor 0.14% Premium 0.045%
  • Fidelity Inflation-Protected Bond Index Fund Investor 0.19% Premium 0.09%

Here is the full list with changes (official page):

[Read more…]

Betterment Review 2017: All Plans Now Include Human Financial Advice

bment1707_0(Updated July 2017. Added details about unlimited access to human advice for all customers, Socially Responsible Investing (SRI) Portfolio options, simplified pricing structure with lower costs for some.)

Betterment is an independent hybrid digital/human advisor that will manage a diversified mix of low-cost index funds and help you decide how much you’ll need to save for retirement. (They are not tied to a specific brand of funds like Vanguard or Schwab). Betterment is also an RIA, which means they have a legal fiduciary duty to keep client interests first. They frequently announce new features and improvements, so I will work to keep this feature list updated.

Diversified portfolio of high-quality, low-cost ETFs. Their portfolios are a diversified mix of several asset classes including: US Total, US Large Value, US Mid Value, US Small Value, International Developed, Emerging Markets, US Corporate Bonds, US Total Bond, Inflation-Protected Treasuries, Muni Bonds, International Bonds, and Emerging Market Bonds. For the most part, Vanguard and iShares ETFs are used.

The traditional Betterment portfolio has a more pronounced tilt towards the size premium and value premium than the cap-weighted indexes. You could argue the finer points of whether this will really create higher risk-adjusted returns, but overall it is backed by academic research.

Betterment has also added a Socially Responsible Investing (SRI) portfolio option. These SRI portfolios also work with their Tax-loss harvesting (TLH) and Tax-coordinated portfolios (TCP) features (see below)>

Free access to human advice for everyone. In July 2017, Betterment announced that all of their customers can message a licensed financial experts. Digital members (0.25% annual fee) can ask questions any time via their mobile app. Digital members should expect an answer in approximately one business day. Betterment Premium members (0.40% annual fee) have unlimited e-mail and direct phone access to “Certified Financial Planner professionals”. Here’s a quote from their press materials as to what they can help you with:

Our experts can assist with deciding which funds to move to Betterment, setting goals (like saving for college, a house, or retirement), and identifying which Betterment tax features may be right. They can also help you make important investment decisions, like choosing risk levels, amounts to invest, and types of accounts.

Reading between the lines, Digital members get “licensed financial experts” while Premium members get “Certified Financial Planner professionals”. This suggests that while Digital members will still get fiduciary (client-first) advice, Premium members will get access to the more-experienced advisors in exchange for paying their higher fee.

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Retirement planning software with external account balances. RetireGuide is Betterment’s retirement planning software, launched in April 2015. This service links your external accounts from other banks, brokerages, and 401k plans (similar to Mint and Personal Capital) in order to see your balances without having to manually input them. According to their methodology guide [pdf], they don’t analyze your transactions to estimate savings rate, they are just pulling in balances.

How much do I have invested elsewhere? Am I saving enough money? How much estimated income will I have in retirement? Your future Social Security income is estimated for your based on your chosen retirement age and birthdate. You can change many of the variables as you like.

Account types. Betterment now supports taxable joint accounts, trust accounts, 401k rollovers, Traditional IRAs, Roth IRAs, SEP IRAs, and Inherited IRAs.

Tax-efficent asset location. They will place different asset classes in your taxable accounts vs. tax-deferred accounts (IRAs, 401ks) for a higher after-tax return. In addition, if you have multiple types of accounts at Betterment (i.e. both IRA and taxable), it will manage multiple accounts as a single portfolio, placing assets that are taxed more into more favorably taxed accounts (like IRAs). Note that this only works across accounts that are held at Betterment. It does not adjust for non-Betterment accounts. This is called their Tax-Coordinated Portfolio (TCP).

Use dividends and new contributions to rebalance. They will use your dividends and new contributions to rebalance your asset classes in order to minimize sells and thus minimize capital gains.

Daily tax-loss harvesting. Betterment’s “Tax-loss Harvesting+” (TLH+) software monitors your holdings daily and attempts to find opportunities to harvest tax losses by switching between “similar but not substantially identical” ETFs. If you can delay paying taxes and reinvest them, this can result in a greater after-tax return. The exact “tax alpha” of this practice depends on multiple factors like portfolio size and tax brackets. You can read the Betterment side of things in their whitepaper. Here is an outside viewpoint arguing for more conservative estimates.

My opinion is that there is long-term value in tax-loss harvesting and especially daily monitoring to capture more losses. However, I also think it’s wise to use a conservative assumption as to the size of that value. (DIY investors can perform their own tax-loss harvesting as well on a less-frequent basis. I do it myself, but it’s rather tedious and I’m definitely not doing it more often than once a year. I would gladly leave it to the bots if it was cheap enough.)

Invest your excess cash automatically. Automatic contributions are good, but perhaps you don’t want to commit to a set amount each month. (Ideally, you do commit to a set amount, and this service invests more money on top of that.) Called SmartDeposit, you link your checking account and choose your Checking Account Ceiling and Max Deposit amount. If your checking account balance goes above the ceiling, Betterment will automatically sweep over money and invest it for you. Betterment will account for future scheduled deposits so you don’t over-contribute.

Fee schedule. In July 2017, Betterment simplified their fee structure change down to two tiers. Both now include access to human advice.

  • Betterment Digital. No minimum balance. Digital portfolio management and guidance. Unlimited access to “licensed financial experts” via mobile app with ~1 business day turnaround time. Flat fee of 0.25% of assets annually. The management fee on any assets over $2 million is waived.
  • Betterment Premium. $100,000 minimum balance. Digital portfolio management and guidance. Unlimited access to “CFP professionals” financial experts” via e-mail or phone. Includes more in-depth advice on investments outside of Betterment. Flat fee of 0.40% of assets annually. The management fee on any assets over $2 million is waived.

Bottom line. Betterment is an independent digital advisory firm with nearly $10 billion in assets, which means they aren’t tied to any specific brand of funds like Vanguard, Fidelity, or Schwab. Their main differentiators from the other independent firms (see my Wealthfront review) are (1) access to human advice available to all customers and (2) a Socially-Responsible portfolio option. Other notable features include: Retirement planning software that syncs with external accounts, tax-loss harvesting, tax-coordinated portfolios (when you have both IRA/401k and taxable at Betterment), and SmartDeposit which automatically invests excess cash from your checking account.

Special offer. Open a Betterment account and you can get your management fee waived for up to 1 year, depending on how much you roll over or deposit within 45 days of account opening. Here’s the breakdown:

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Low-Cost Funds Capture Nearly All of the Market’s Gains (and Losses)

Here’s a quick snapshot that illustrates why Vanguard and other low-cost funds are taking assets from active managers. Via this Bloomberg article. The US stock market has been on a great run for nearly 9 years now, and low-cost funds have been giving investors nearly all of those gains.

vgtriple

People always chase past performance. The vast majority of index fund money is in US stock funds, and those have the best recent past performance. But when the US stock market eventually stumbles, those low-cost index funds will also be great at passing along all of those losses.

What will happen then? While it hasn’t been very helpful recently, I still agree with those recommending have diversified exposure into other areas like developed international stocks, emerging markets stocks, and high-quality bonds.