Sequence of Returns Risk During Retirement Illustration

Businessweek has an article discussing the difficulties when trying to make a retirement nest egg last for the rest of your life. Most people just worry about the average returns of their investments. But another important concern during the withdrawal phase is sequence of returns risk.

Two retirees can start with the same initial portfolio balance and experience the same average return, but if one experiences highly negative returns in the first few years of withdrawals they can end up with very different outcomes. Instead of explaining this concept with a list of numbers, here is a graphical version from the BW article. Both Jane and John start with $1 million, experience 7% average returns, and take out $50,000 a year with a 3% increase each year for inflation.

sor_risk

Jane ends up 20 years later with $700,00 more than she started, and John is flat broke. Although the sequence of returns shown is a bit extreme, they are simply mirrored and it is still entirely possible.

Some people take this to mean that you shouldn’t retire when the market has been on a good bull run, but I think the point is that you simply don’t know what order your future returns will be. The bull run could keep on going and create a bubble, and then pop many years later. Or something like a declaration of war could crush the market even further even if things have already been bad for a while.

Briefly, a couple of options that can help alleviate this sequence of returns risk are a dynamic withdrawal strategy that continually adjusts to actual returns (no set number every year), and also annuitizing part of your portfolio using a single-premium immediate annuity. Finally, don’t forget the traditional advice of holding a sizable chunk of quality bonds in your portfolio.

Prosper vs. LendingClub Investor Experiment: 2 Year Update

lcvspr_clipoIn November 2012, I invested $10,000 into person-to-person loans split evenly between Prosper Lending and Lending Club, looking for high returns from a new asset class. After diligently reinvesting my earned interest into new loans, I stopped my after one year (see previous updates here) and started just collecting the interest and waiting see how my final numbers would turn out at the end of the 3-year terms.

It is now about a week shy of the two year anniversary of this experiment, so here’s another quick update.

$5,000 LendingClub Portfolio. As of October 20, 2014, the LendingClub portfolio has 157 current and active loans. 71 loans were paid off early and 21 have been charged-off ($314 in principal). 3 loans are between 1-30 days late. 5 loans are between 31-120 days late, which I will assume to be unrecoverable. $3,515 in uninvested cash from early payments and interest. Total adjusted balance is $5,392. LendingClub reports my adjusted net annualized return as 5.27%. Here is a screenshot of my account.

1410_lc

$5,000 Prosper Portfolio. My Prosper portfolio now has 142 current and active loans, 85 loans paid off early, 31 charged-off. 6 loans are between 1-30 days late. 6 are over 30 days late, which to be conservative I am also going to write off completely (~$66). $3,024 in uninvested cash (early payments and interest). Total adjusted balance is $5,334. Prosper reports my net annualized return as 5.56%. Here is a screenshot of my account.

1410_prosper

Recap and Thoughts

  • P2P lending is legit. LendingClub is preparing for an IPO on the NYSE. Institutional investors are buying a significant portion of LendingClub and Prosper loans. This WSJ article says 66% of Prosper loans in 2014 have been sold to institutional investors. What started out as the Wild West of unsecured loans is now accepted by Wall Street. This would suggest that reliable positive returns for investors are more likely, but also that chances for outsized returns will be diminished.
  • If you continually reinvest your interest, the return numbers you see will be higher than your actual long-term returns. Due to how they are calculated, your reported return will deteriorate as your loans age and more borrowers default. After two years, Prosper reports my annualized return as 5.56%. 4 months ago, it was 5.76%. 8 months ago, it was 7.55%. LendingClub reports my annualized return after 2 years as 5.27%. 4 months ago, it was 5.94%. This doesn’t mean you shouldn’t invest and your returns may better than mine, but be aware of this pattern if most of your loans are new.
  • If I were to invest all over again… First, I would do it within an IRA to avoid tax headaches. I would also buy at least 100 loans x $25, which also happens to be the $2,500 minimum for free automated investments at LendingClub (no minimum at Prosper). Picking loans can be fun for some but I got bored after a while.
  • LendingClub vs. Prosper relative performance. I tried my best to invest at both websites with the same criteria and overall risk preference. Right now, LendingClub is ahead by a bit. I wouldn’t put too much importance on the absolute numbers as I stopped reinvesting into new loans (at both sites) after the first year. Here’s an updated chart tracking the LendingClub and Prosper adjusted balances separately over these past two years:
    1410_prosperlc

Early Retirement Portfolio Income Update – October 2014

When investing, should you focus on income, or total return? I like the idea of living off dividend and interest income, but I also think it is easy for people to reach too far for yield and hurt their overall returns. But what is too far? That’s the hard part. Certainly there are many bad investments lurking out there for desperate retirees looking for maximum income. If possible, I’d like to invest for total return and then live off the income.

A quick and dirty way to see how much income (dividends and interest) your portfolio is generating is to take the “TTM Yield” or “12 Mo. Yield” from Morningstar quote pages. Trailing 12 Month Yield is the sum of a fund’s total trailing 12-month interest and dividend payments divided by the last month’s ending share price (NAV) plus any capital gains distributed over the same period. SEC yield is another alternative, but I like TTM because it is based on actual distributions (SEC vs. TTM yield article).

Below is a close approximation of my most recent portfolio update. I have changed my asset allocation slightly to 60% stocks and 40% bonds because I believe that will be my permanent allocation upon early retirement.

Asset Class / Fund % of Portfolio Trailing 12-Month Yield (10/18/14) Yield Contribution
US Total Stock
Vanguard Total Stock Market Fund (VTI, VTSAX)
24% 1.78% 0.43%
US Small Value
WisdomTree SmallCap Dividend ETF (DES)
3% 2.81% 0.08%
International Total Stock
Vanguard Total International Stock Market Fund (VXUS, VTIAX)
24% 3.35% 0.80%
Emerging Markets Small Value
WisdomTree Emerging Markets SmallCap Dividend ETF (DGS)
3% 2.97% 0.09%
US Real Estate
Vanguard REIT Index Fund (VNQ, VGSLX)
6% 3.51% 0.21%
Intermediate-Term High Quality Bonds
Vanguard Limited-Term Tax-Exempt Fund (VMLUX)
20% 1.70% 0.34%
Inflation-Linked Treasury Bonds
Vanguard Inflation-Protected Securities Fund (VAIPX)
20% 1.78% 0.36%
Totals 100% 2.31%

 

The total weighted yield was 2.31%, as opposed to 2.49% calculated last quarter. This means that if I had a $1,000,000 portfolio balance today, it would have generated $23,100 in interest and dividends over the last 12 months. Now, 2.31% is significantly lower than the 4% withdrawal rate often recommended for 65-year-old retirees with 30-year spending horizons, and is also lower than the 3% withdrawal that I prefer as a rough benchmark for early retirement. Hurray for zero interest rates!

So how am I doing? Using my 3% benchmark, the combination of ongoing savings and recent market gains have us at 90% of the way to matching our annual household spending target. Using the 2.31% number, I am only 69% of the way there. That’s a big difference, and something I’ll have to reconcile. Consider that if all your portfolio did was keep up with inflation each year (0% real returns), you could still spend 2% a year for 50 years. From that perspective, a 2% spending rate seems extremely cautious.

Early Retirement Portfolio Asset Allocation Update – October 2014

Here’s an update on my investment portfolio holdings for Q3 2014. This includes tax-deferred accounts like 401(k)s and taxable brokerage holdings, but excludes things like physical property and cash reserves (emergency fund). The purpose of this portfolio is to create enough income to cover all of our household expenses.

Target Asset Allocation

aa_updated2013_bigger

I try to pick asset classes that will provide long-term returns above inflation, regular income via dividends and interest, and finally offer some historical tendencies to balance each other out. I don’t hold commodities futures or gold as they don’t provide any income and I don’t believe they’ll outpace inflation significantly. In addition, I am not confident in them enough to know that I will hold them through an extended period of underperformance (don’t buy what you don’t understand).

Our current ratio is about 70% stocks and 30% bonds within our investment strategy of buy, hold, and rebalance. With a self-directed portfolio of low-cost index funds and low turnover, we minimize management fees, commissions, and taxes.

Actual Asset Allocation and Holdings

1410_portfolio_aa

Stock Holdings
Vanguard Total Stock Market Fund (VTI, VTSMX, VTSAX)
Vanguard Total International Stock Market Fund (VXUS, VGTSX, VTIAX)
WisdomTree SmallCap Dividend ETF (DES)
WisdomTree Emerging Markets SmallCap Dividend ETF (DGS)
Vanguard REIT Index Fund (VNQ, VGSIX, VGSLX)

Bond Holdings
Vanguard Limited-Term Tax-Exempt Fund (VMLTX, VMLUX)
Vanguard Intermediate-Term Tax-Exempt Fund (VWITX, VWIUX)
Vanguard High-Yield Tax-Exempt Fund (VWAHX, VWALX)
Vanguard Inflation-Protected Securities Fund (VIPSX, VAIPX)
iShares Barclays TIPS Bond ETF (TIP)
Individual TIPS securities
U.S. Savings Bonds (Series I)

Notable Changes

Last quarter, I had sold my PIMCO Total Return fund holdings. Well, that was lucky on my part with all the recent Bill Gross drama. I decided to sell my stable value fund holdings too as I needed rebalance into more TIPS bonds and I was now able to buy TIPS inside my employee retirement plan using the Schwab PCRA brokerage window. All of our tax-deferred space is now taken up with TIPS and REITs, so the rest of my bonds are tax-exempt munis and savings bonds.

Otherwise, not much new, I rebalanced with new money and reinvested dividends. By this, I mean I don’t automatically reinvest dividends into the same mutual fund or ETF that generated them. Instead, they accumulate for bit and then I reinvest them in whatever asset class has been lagging recently. This also makes fewer tax lots for my taxable accounts.

That’s it for portfolio holdings. In a separate update post, I will update the amount of income that I am deriving from this portfolio.

Comparing Three Major Levers You Can Pull On Your Retirement Portfolio

One of the most popular posts on the Vanguard blog is My one piece of investing advice by Andy Clarke. Let’s start with the following baseline scenario:

  • Investor begins working at 25, but starts saving at age 35.
  • 12% savings rate
  • Moderate asset allocation (50% stocks and 50% bonds)
  • Salary starts at $30,000 but increases with age

Now, imagine there are three “levers” that you could pull in order to try and increase your final savings balance at retirement – asset allocation, savings rate, or time horizon. In each case, everything else in the scenario stays the same.

threedoors3

Which single option do you think has the most impact? Taken from the blog post, the results below are based the median balance found after running Monte Carlo computer simulations based on historical returns.

threedoorsresults

I would look past the absolute values and instead focus on the relative effect of each option. In case you haven’t figured it out, the one piece of investing advice is “save more”. The easiest lever to pull is a more aggressive asset allocation because it doesn’t require the pain of spending less and saving more (though you get more stomach-churning bumps and less reliable results). But here we see that saving just 3% more was equally powerful. If you pulled all three levers, your final balance would have more than doubled!

Investment Robo-Advisor Comparison Chart

Automated portfolio management is the new hotness. In the coming years, I see a continued expansion of players followed by a lot of mergers and acquisitions. ETF.com analyst Elisabeth Kashner has finished her series on robo-advisors with a final comparison of the current field – The Best Robo Advisor … For You . The entire series is interesting for those that care about such things, but here is the final summary chart:

robochart

You may (or may not) be surprised by what she actually picks for her son’s starter portfolio.

Schwab Personal Choice Retirement Account (PCRA) Review – 401k Brokerage Window

Tax-advantaged 401k and 403b plans can help you save for retirement, but did you know that you’re probably paying for all the costs of this “employee benefit”? 76% of large employers have workers pick up all the costs of 401(k) administration, according to a recent Forbes article Creative Ways to Cut Your 401(k) Fees. The tab is often quietly paid via high-fee mutual funds (which in turn kick back money to the administrator). The article also focuses on brokerage windows, an “escape hatch” that allows employees to move their funds into a self-directed account with a many more investment options. Their availability is growing:

forbeswindow

What is the catch? These self-directed plans have their own set of fees, notably annual maintenance fees and transaction fees. While regular 401(k) plan options may be limited and more expensive on a percentage basis, they usually don’t charge transaction fees each time you buy or sell. For this reason, brokerage windows tend to work better people with larger account balances. With bigger trade sizes, a flat commission is only a small percentage of the total amount involved.

We recently gained access to Schwab’s brokerage window, called the Personal Choice Retirement Account (PCRA). The mechanics were pretty simple. After completing a special application, you could sell a portion (or all) of your existing investments and transfer them into a “Schwab PCRA” bucket. That money then shows up into your linked account at Schwab.com, where you do all your trades.

Commission Schedule and Available Mutual Fund List. Here is the PCRA fee schedule and PCRA mutual fund availability list that was provided to me by Schwab. (I am assuming these documents are the same across all PCRA plans, but I could be wrong. As I’ll explain shortly, just because something is listed does not mean it is available to everyone.)

The commission schedule is pretty similar to what is available in their standard brokerage account. $8.95 ETF and stock trades, $0 trades for Schwab ETFs. No commission on their No-Transaction-Fee mutual fund list (funds have to pay to be on the list), otherwise $50 to buy and $0 to sell. Schwab PCRA does not charge any annual account or maintenance fees, but your Retirement Plan Service Provider may charge account maintenance fees or some form of “recordkeeping fees”. In our case, there is a $50 annual account fee.

The mutual fund list is quite extensive. Let’s say I was trying to buy the Vanguard REIT ETF (VNQ). I searched and found two results:

pcra3

The big caveat in my particular case: ETF and stock trades were not allowed at all. I still tried to make a purchase but got this message:

pcra1

From the fee schedule, I assume that some PCRA plans will offer this feature. But in my case, I had to be satisfied with buying the Vanguard REIT mutual fund (VGSIX) and paying $50 per buy trade. The good news is that I was able to buy Admiral Shares (VGSLX) which has the same expense ratio (0.10%) as the ETF version ($10,000 minimum).

pcra2

Should I use my brokerage window? According to this Money article, just 5.6% of 401(k) investors opt for a brokerage window even with it is offered. The Schwab PCRA has worked out well for me as an alternative to my standard 401k investment options, but only because a few things aligned:

  • My balance was big enough. Paying $50 a year and $50 per trade is only worth it when your balance is big. Let’s say my balance is $100,000. $50 is only 0.05% of $100,000. If I am saving over 0.05% in expense ratios every single year in exchange, that is a great deal. But $50 is a full 1% of a $5,000 balance.
  • There was a better option in the brokerage account. For example, the S&P 500 index fund in my 401k standard menu charges 0.30% annually, while I can access a Schwab S&P 500 index fund at only 0.09% annually. In my case, I wanted cheap access to the REIT asset class which I didn’t have otherwise. Only about 25% of 401k plans offer access to an REIT fund.
  • I don’t trade too frequently. $50 a pop adds up, so I intend to accumulate money in the normal account, and then transfer over a chunk of money once a year to my Schwab PCRA. This way my bi-weekly contributions are invested for free, and I limit my $50 Schwab trades to once or twice a year.

What Are The Real-World Benefits of Automated Tax Loss Harvesting?

scheduledTax-loss harvesting (TLH) is a technique used to minimize taxes on your taxable investments by “harvesting” capital losses during market declines. With DIY investors, losses are usually only harvested once a year. But with an computer as your portfolio manager, you could attempt to harvest losses continually on a monthly or even daily basis.

Wealthfront, Betterment, and FutureAdvisor all tout the benefits of their automated tax-loss harvesting services, each claiming that their service could increase your returns somewhere between 1% and 3% a year on average. Those are impressive numbers, and most importantly a much bigger number than the fees they charge. Great deal?

Elisabeth Kashner of ETF.com takes a closer look at those claims. Here is my summary of the noted concerns:

  • Tax-loss harvesting defers your taxes by lowering your cost basis. This means that you’ll have to pay more taxes later when you eventually sell (unless you die or donate it). Data presented by certain robo-advisors do not take this into account, and continue to avoid the subject even when confronted about it directly.
  • Most of the claims rely on theoretical backtested data, not the results of actual client portfolios. This is somewhat understandable as many of them are new, but we find that when real-world results are being published, those excess return numbers have so far been under 1% annualized.
  • More than one of them cherry-picked the period from 2000 to 2013 for their analysis, which has the ideal sequence of returns – big losses first (so you can harvest something) and then big gains afterward (so you can compound your tax-deferred money). If you choose other time periods the numbers can come out significantly less rosy.
  • Most of the analyses assume that the investor is in the highest tax bracket (35% or higher), which maximizes the tax benefit. However, many investors in these services could be in the 15% income tax bracket or even 0% capital gains tax bracket. That will also lower the actual tax benefit of TLH.

Read the article comments as well. There, finance author Rick Ferri adds:

I agree the benefit of TLH isn’t 1%, but it isn’t 0.09% either. The answer is someplace in the middle – and it is investor specific.

I think this quote from the author sums things up well:

My point was not that there is never any value to TLH. It’s that predicting this value is fraught, because there are many variables. Given this variability, I find it questionable that the robo advisors’s marketing materials present best-case scenarios, sometimes without accounting for the terminal capital gains liability caused by the lowered basis.

Essentially, temper your expectations as the numbers being marketed at you are based on best-case scenarios. It is impossible to know the true benefit of tax-loss harvesting ahead of time, but quite possibly less than 1% annualized. This still leaves the possibility for the benefits of automated TLH to outweigh the cost, but it is nowhere near a certainty.

Harry Markowitz Personal Investment Portfolio and Strategy

As mentioned in my Acorns app review, Harry Markowitz won the Nobel Prize in Economics for his pioneering work in Modern Portfolio Theory, which says that a rational investor should pick an “efficient” portfolio that uses a mix of assets to maximize the expected portfolio return for a given level of risk. You can read all about the Harry Markowitz Model on his Wikipedia page.

Implementation of this mathematical theory has produced many “mean-variance optimized” portfolios containing upwards of 10 different asset classes. Basically these are backtested from historical performance numbers. One of the more complex examples is the 7Twelve Balanced Portfolio shown here:

7twelve_pie

But what did Harry Markowitz actually hold in his own personal portfolio? What was his investment strategy?

Consider this story from Jonathan Zweig in an NYT article about emotions and investing:

Mr. Markowitz was then working at the RAND Corporation and trying to figure out how to allocate his retirement account. He knew what he should do: “I should have computed the historical co-variances of the asset classes and drawn an efficient frontier.” (That’s efficient-market talk for draining as much risk as possible out of his portfolio.)

But, he said, “I visualized my grief if the stock market went way up and I wasn’t in it — or if it went way down and I was completely in it. So I split my contributions 50/50 between stocks and bonds.” As Mr. Zweig notes dryly, Mr. Markowitz had proved “incapable of applying” his breakthrough theory to his own money. Economists in his day believed powerfully in the concept of “economic man”— the theory that people always acted in their own best self-interest. Yet Mr. Markowitz, famous economist though he was, was clearly not an example of economic man.

Next, read this Chicago Tribune interview by Gail MarksJarvis:

Early in his career, he did not take the risks some investment advisers suggest for young investors to maximize returns. Rather, he saved regularly and put half his money into stocks and half into bonds to grow while controlling risks. When he thought he had accumulated too much in either category, he stopped putting money there for a while and directed savings to the neglected group. [...]

“I never sold anything,” he said. If stocks were increasing in value, he would let that portion grow for a while, but eventually he would stop stock purchases and beef up the bonds. The idea: The bonds would insulate him from the downturns that crush stocks from time to time without clear warning. [...]

“Say you were 65, and invested $1 million, with 60 percent in stocks and 40 percent in bonds,” he said. “It became $800,000 [during the financial crisis], and you are not happy, but you lived to invest another day.”

I happen to think Markowitz’s actions overall were quite rational and even wise. We could all learn some lessons from his personal strategies.

  • Rely on saving, not risk-taking. Markowitz understood the pain of losing your hard-earned money in a down market. Young investors are often told to go 100% stock or close to that, but he was 50/50 and stuck with it.
  • Don’t worry about fine-tuning to achieve the perfect portfolio, as it’s all based on the past anyway. Nobody knows what will actually be the “efficient” portfolio for the next 20, 30, 40 years. As long as you have your bases covered, keep it simple. Warren Buffett also recommends simplicity for his wife’s trust and even though he would do a 90% stocks and 10% bonds split, you likely don’t have the ability to lose 40% of your portfolio and go… ah well I’ll just live on the remaining $100 million.
  • Tweak, but don’t panic. Buy and hold is one strategy that will work “well enough”. However, if you feel like you must, you can do like Markowitz and make some tweaks now and then… just don’t do anything extreme that could catastrophically damage your portfolio.

Regular savings plus a simple 50/50 or 60/40 portfolio plus no panic selling will do quite well over a long period of time. That’s a solid game plan, even for mathematical geniuses.

ShareBuilder Promotion Codes: Free Stock Trades (Updated 2014)

Added another new code. Here are some promotion codes for ShareBuilder, a discount brokerage now owned by Capital One. Real-time trades are now $6.95 and automated trades are $4. They give out codes for various promotions, and like coupon codes they often work in your account even if you weren’t given the code directly. Sometimes they don’t though, so have reasonable expectations.

Don’t have an account yet? Get a up to a $600 opening bonus depending on your initial deposit size, and then add the promo codes below afterward. You can often double-dip on codes if you have both a individual account and joint account. Custodial accounts for kids are also available.

How To Use
To enter the codes into your account, log in and go to the Accounts tab > Overview > Profile & Settings > Enter Promotion tab shown below.

In the marked box, enter a code. If it works, you should see a confirmation that says something like:

Thank you for referring ShareBuilder to your friends! Your 2 real-time trades have been credited to your account and are available to use immediately.

Most recently updated codes

  • SWEEP2014 (1 free real-time trade, hat tip to reader Hog)
  • PLACETRADE14 (1 free real-time trade)

Codes added within the last year or so (possible success)

BDAY14Y (hat tip reader Sean)
SWEEP600 (1 free real-time trade)
BDAY14AU (1 free automatic investment)
3AIP
3AIP*GEJZOH

[Read more...]

WiseBanyan Review: Free Portfolio Management Experiences & Screenshots

wblogoEarlier this year I wrote about WiseBanyan.com, an online portfolio advisory service similar to Betterment and Wealthfront. WiseBanyan charges no advisory fees, no trading commissions, and have no minimum opening deposit. They will design, buy, hold, and rebalance a basket of low-cost ETFs for free, and all you are left with are the ETF expense ratios which you’d have to pay anyway.

Thanks in part to your interest as readers, I was able to get off their waitlist and open an account with $10,000 of my own money in March 2014. (Current wait is reportedly less than a month.) Here is my review as an actual user for roughly 6 months.

Application process. The account opening process was similar to other discount brokers and online portfolio managers. You must provide your personal information including Social Security number, net worth, income, investing experience, etc. No credit check. They do check identity, so they may ask for supporting documents if you just moved or something.

There is then a risk questionnaire. The questions can seem mundane but take it seriously, as the 10 answers you provide will directly determine the portfolio asset allocation that they choose for you. There will be no follow-up surveys, e-mails, or phone calls. Here is a screenshot and example question:

wisebanyan1

Side notes: As a start-up, there are temporary restrictions. They currently do not accept joint, trust, or custodial accounts. They do not accept IRA or 401k rollovers at this time. They also do not accept inbound brokerage account transfers.

Funding. You can fund your deposit electronically, using your bank routing and account number. (They only accept bank wires as an alternative, no paper checks.) The money gets sucked from your bank and the portfolio is bought immediately when they get the money.

I didn’t track this closely, but according to their site the initial deposit takes between 4-5 business days total (3-4 business days for funds transfer, account verification, and ETF purchases, plus one day for data upload). That sounds about right. Future deposits will take 1-2 business days to process.

Fractional shares. WiseBanyan uses FolioFN as their broker-dealer (separate company that hold your assets in the background) which means they can use their ability to keep track of fractional shares. Most discount brokers and other online portfolio managers require you to own whole shares, so you’ll often have something like $57 sitting in cash.

Recall that WiseBanyan has no required minimum deposit or portfolio balance. If you really did open account with $100, they will actually buy less than one share of several low-cost diversified ETFs and you’ll own tiny, tiny portions of thousands of companies with no idle cash. With a normal discount brokerage, that might not even buy you one share of anything (VTI is over $100 a share on its own).

Portfolio asset allocation. I was assigned a portfolio risk score of 7.7, which corresponded to a stocks/bond ratio of 70%/30%.

wisebanyan4

Here is the target asset allocation that I was assigned:

wisebanyan2

All portfolios are constructed using the following seven ETFs:

  • Vanguard Total Stock Market ETF (VTI)
  • Vanguard FTSE Developed Markets ETF (VEA)
  • Vanguard FTSE Emerging Markets ETF (VWO)
  • iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD)
  • Vanguard Intermediate-Term Government Bond ETF (VGIT)
  • Vanguard REIT ETF (VNQ)
  • iShares TIPS Bond ETF (TIP)

My opinion is that the ETF allocations from all “robo-advisors” are at least 80% the same, and with the remaining 20% you can’t really tell who’s going to win performance-wise anyway. They are all backtested using some form of Mean-Variance Optimization (MVO) and Modern Portfolio Theory (MPT).

While not exactly what I would have chosen for myself, I personally think the portfolio above is fine. The ETFs have low costs and come from large, respected providers in Vanguard and iShares. All of the major asset classes are covered. There are no commodities futures or natural resource ETFs, which some experts think are useful and other experts think are useless. Note that REITs are considered to be in the bond category.

Website user interface. It feels very “Web 2.0″ which means it is clean and functional, but won’t win any design awards. The site is not mobile-responsive (they say they are working on it). Here is a screenshot from my personal account:

wisebanyan3

Smartphone app. There is no smartphone app (also working on it). Considering their young client base, my suggestion is that even a really simple one that just pulls up your updated account balance and positions would be nice. It doesn’t have to include all the functionality of the website. We like to be able to check the balance at any time of day!

Statements and ongoing communication. You might be afraid that with a free service, your information is going to be sold or you’re at least going to be bombarded with e-mail newsletters with some sort of upsell opportunity. Actually, I hardly get any ongoing e-mails from WiseBanyan at all. I did get one e-mail and one tweet from their CEO and co-founder, Herbert Moore (must be a small company!). I also can’t find anything in their privacy policy about them selling your information.

Electronic statements are free, but paper statements will cost $10 each or $150 a year their fee schedule. To view your online statement, you actually have to log into the broker-dealer site at FolioClient.com with a separate username and password. It is a bit clunky and another work in progress.

Customer service. I have not had a need to contact them, but I did anyway for the purposes of this review. Calling their customer service phone number at 646-593-8361 during their stated hours of 9am – 7pm EST reached an individual’s voicemail box. I didn’t leave a message. An email sent to support@wisebanyan.com was answered courteously in two hours by “Vicki” whom I suspect was the co-founder Vicki Zhou.

Future concerns? According to this ETF.com interview, the average client is 34 years old and opens with a $4,000 deposit, much younger and of more modest means than those of their competitors. WiseBanyan is running off venture capital while it grows assets, so it will be interesting to see if it can make it with a bunch of smaller accounts while others target Silicon Valley millionaires. They plan on making money with add-on premium features like tax-loss harvesting or selling covered calls.

Bottom line. WiseBanyan is fully functional and delivers on its promise of free automated portfolio management. However, it is not a finished product and you’ll have to pardon their dust. It is a lean startup and it feels that way; your e-mails and calls may be answered by the CEO and/or co-founder. You may like that or you may prefer more polish, but remember that polish costs money. They are aggressively priced (at zero, ahem) and unique in that they are targeting all investors including the young and those with smaller balances. You could open with $100 and set up an auto-transfer of $10 a week and get a diversified portfolio set up with no commissions and no management fees. Where else can you do that?

Early WiseBanyan clients can invite others, so here is my referral link which will allow you to skip the waitlist. I believe that I can earn credits towards free tax-loss harvesting if enough people sign up via my link.

Why Didn’t Technology Create a 4-Hour Workday?

Technology is supposed to make our lives easier over time, but what is the reality? We may not spend all day hunting and gathering anymore, but we still work similar hours to our great-grandparents. From the paper A Century of Work and Leisure [pdf] published in the American Economic Journal:

We find that hours of work for prime age individuals are essentially unchanged, with the rise in women’s hours fully compensating for the decline in men’s hours. [...] Overall, per capita leisure and average annual lifetime leisure increased by only four or five hours per week during the last 100 years.

The following video by CGP Grey called Humans Need Not Apply methodically describes how robotic automation will soon make an additional chunk of people unemployable.

Horses aren’t unemployed now because they got lazy as a species, they’re unemployable. There’s little work a horse can do that do that pays for its housing and hay. And many bright, perfectly capable humans will find themselves the new horse: unemployable through no fault of their own.

If robots are doing all the work, shouldn’t that mean that the workers should be able to get by working less? Some people thought so. The famous economist John Maynard Keynes wrote in 1930 that “by 2030 he expected a system of almost total “technological unemployment” in which we’d need to work as few as 15 hours a week, and that mostly just to avoid losing our minds from all the leisure.”

That is taken from the Vice.com article Who Stole the 4-Hour Workday? (warning: other parts of this site may be considered NSFW), which discusses how the dream of a shortened workweek fell apart:

A new American dream has gradually replaced the old one. Instead of leisure, or thrift, consumption has become a patriotic duty. Corporations can justify anything—from environmental destruction to prison construction—for the sake of inventing more work to do. A liberal arts education, originally meant to prepare people to use their free time wisely, has been repackaged as an expensive and inefficient job-training program. We have stopped imagining, as Keynes thought it so reasonable to do, that our grandchildren might have it easier than ourselves. We hope that they’ll have jobs, maybe even jobs that they like.

The new dream of overwork has taken hold with remarkable tenacity. Hardly anyone talks about expecting or even deserving shorter workdays anymore; the best we can hope for is the perfect job, one that also happens to be our passion. In the dogged, lonely pursuit of it, we don’t bother organizing with our co-workers. We’re made to think so badly of ourselves as to assume that if we had more free time, we’d squander it.

The Vice.com article focuses on the idea that workers should organize and fight for their share of the benefits.

Instead, we see that the benefits of any technological advancement or increase in productivity has predominantly gone to the owning class (business owners, content owners, and corporate executives) as opposed to the working class. A thick, NYT bestselling economics book posits that when the rate of return on capital is greater than the rate of economic growth, the result is wealth inequality.

I certainly don’t know how this will play out. Will robots cause mass unemployment? Will we all have 20-hour workweeks with no pay cut? In the meantime, as an individual its seems wise to keep converting my excess work energy into ownership of assets. If all you do is work, get paid, and spend it all, then you may be stuck in the rat race indefinitely. A way out is to save a portion and buy some assets. Businesses, real estate, shares of common stocks. Or start your own business and/or create some assets.