Adding Betterment or Wealthfront in addition to Vanguard account

[RJ]

Hi everyone,

I am a faithful Boglehead and WCI follower. My wife and I are both employed physicians and fortunately have lots of pre-tax space including my 401K with significant company match, her 457, 403B and 401a (employer's match). We put away ~ $90,000 pre-tax every year. In addition, we opened a taxable Vanguard account for backdoor Roths and our taxable account split into 3 fund portfolio with 41/59 AA. I am very intrigued with an idea of TLH and want to open a Betterment or Wealthfront account (leaning towards Betterment). I know I can do TLH myself, but someone doing it for me would be much nicer . My question is should I transfer my Vanguard funds to Betterment or keep both since I need Vanguard for backdoor Roth anyway? I do have another ~200K sitting in checking account, so I have funds to start Betterment account without touching Vanguard funds. What do you think?

[Noah]

I would use the Wealthfront/Betterment account as a post tax regular investment account. The fees of these accounts aren't really worth it for pre-tax 401k/Roth options but the TLH seems nice for your taxable account. Definitely worth it to take your 200k in checking and start investing it taking some cash drag out of your portfolio.

[RJ]

Noah wrote:

I would use the Wealthfront/Betterment account as a post tax regular investment account. The fees of these accounts aren’t really worth it for pre-tax 401k/Roth options but the TLH seems nice for your taxable account. Definitely worth it to take your 200k in checking and start investing it taking some cash drag out of your portfolio.

Click to expand...

Thanks for your reply. I didn't mean to imply that I wanted to transfer funds from my pre-tax accounts. Those are separate and are not going anywhere. I was only talking about post-tax Vanguard account.

[jz]

The two of you are SO on the right track.   YES, take most of your checking account cash  and transfer it to Betterment or Wealthfront. TLH at the granular level is a beautiful thing.

[VagabondMD]

I have taxable accounts at Fidelity, Vanguard, and Betterment (in decreasing order of size). I contribute to the Vanguard and Betterment accounts with regularly monthly and semi-monthly contributions, respectively. My non-tax deferred accounts contribute nearly 50% of my overall liquid net worth. Over time, the ability to put money in this space seems to grow.

[RJ]

Any thoughts on Betterment vs Wealthfront? I know this has been beaten to death...

[Noah]

Very similar. I think that Wealthfront is the better bet for accounts below 15k (no fees) for that amount with them. Sort of a toss up regarding fees up to 100k then Betterment is cheaper but Wealthfront has a more sophisticated tax loss harvesting algorithms that they say makes up for the 0.25 vs 0.15% fee. Overall I think it's going to be pretty close. I wouldn't stress about it. I am still trying these services out so use Wealthfront as I am starting at less than $15,000. I like it a lot so far.

[litovskyassetmanagement]

RJ wrote:

Hi everyone,

I am a faithful Boglehead and WCI follower. My wife and I are both employed physicians and fortunately have lots of pre-tax space including my 401K with significant company match, her 457, 403B and 401a (employer’s match). We put away ~ $90,000 pre-tax every year. In addition, we opened a taxable Vanguard account for backdoor Roths and our taxable account split into 3 fund portfolio with 41/59 AA. I am very intrigued with an idea of TLH and want to open a Betterment or Wealthfront account (leaning towards Betterment). I know I can do TLH myself, but someone doing it for me would be much nicer . My question is should I transfer my Vanguard funds to Betterment or keep both since I need Vanguard for backdoor Roth anyway? I do have another ~200K sitting in checking account, so I have funds to start Betterment account without touching Vanguard funds. What do you think?

Click to expand...

Neither is worth it after-tax.  They do what's called 'tax loss harvesting', and they do it so aggressively that it amounts to active trading.  This actually reduces your return compared to holding the same identical securities.  I've done some analysis of this.  The problem is that they constantly switch allocations so it is difficult to analyze, but from what I've seen I would never recommend an actively traded tax loss harvesting platform.  Bogleheads should know better.  There is a good reason why active trading is bad.  Tax loss harvesting sounds good in principle, but getting it right is impossible because sometimes you'll be wrong and sometimes you'll be right, but if you have to sell and buy constantly, the error (exit and entry point) simply gets bigger and bigger with time.  This is just basic stock market math.  It applies to actively managed funds, and to any strategy that purports to do tax loss harvesting.  While they MAY generate an alpha of 1% (I have seen analysis showing that this is wildly overstated), they will actually generate a NEGATIVE alpha due to their constant trading, which will more than negate any tax alpha that they might (or might not) generate.  Thus, the longer the horizon, the worse the performance of this strategy vs. a buy and hold strategy holding identical securities.  Nobody has looked at this yet, and in time, the truth will come out.

[jz]

Kon,   what you do mean by this, .........."they constantly switch allocations so ............"?

[VagabondMD]

Kon Litovsky wrote:

RJ wrote:

Hi everyone,

I am a faithful Boglehead and WCI follower. My wife and I are both employed physicians and fortunately have lots of pre-tax space including my 401K with significant company match, her 457, 403B and 401a (employer’s match). We put away ~ $90,000 pre-tax every year. In addition, we opened a taxable Vanguard account for backdoor Roths and our taxable account split into 3 fund portfolio with 41/59 AA. I am very intrigued with an idea of TLH and want to open a Betterment or Wealthfront account (leaning towards Betterment). I know I can do TLH myself, but someone doing it for me would be much nicer . My question is should I transfer my Vanguard funds to Betterment or keep both since I need Vanguard for backdoor Roth anyway? I do have another ~200K sitting in checking account, so I have funds to start Betterment account without touching Vanguard funds. What do you think?

Click to expand…

Neither is worth it after-tax.  They do what’s called ‘tax loss harvesting’, and they do it so aggressively that it amounts to active trading.  This actually reduces your return compared to holding the same identical securities.  I’ve done some analysis of this.  The problem is that they constantly switch allocations so it is difficult to analyze, but from what I’ve seen I would never recommend an actively traded tax loss harvesting platform.  Bogleheads should know better.  There is a good reason why active trading is bad.  Tax loss harvesting sounds good in principle, but getting it right is impossible because sometimes you’ll be wrong and sometimes you’ll be right, but if you have to sell and buy constantly, the error (exit and entry point) simply gets bigger and bigger with time.  This is just basic stock market math.  It applies to actively managed funds, and to any strategy that purports to do tax loss harvesting.  While they MAY generate an alpha of 1% (I have seen analysis showing that this is wildly overstated), they will actually generate a NEGATIVE alpha due to their constant trading, which will more than negate any tax alpha that they might (or might not) generate.  Thus, the longer the horizon, the worse the performance of this strategy vs. a buy and hold strategy holding identical securities.  Nobody has looked at this yet, and in time, the truth will come out.

Click to expand...

I am going to disagree. The TLH is done by selling the investment that is down and repurchasing an almost-but-not-quite identical EFT in the identical asset class, not tantamount to active trading, IMO. There is not all that much trading.

As for Betterment vs. Wealthfront, I prefer the small and value tilt of Betterment and prefer to avoid the Natural Resources allocation of Wealthfront.

[Zaphod]

Kon Litovsky wrote:

RJ wrote:

Hi everyone,

I am a faithful Boglehead and WCI follower. My wife and I are both employed physicians and fortunately have lots of pre-tax space including my 401K with significant company match, her 457, 403B and 401a (employer’s match). We put away ~ $90,000 pre-tax every year. In addition, we opened a taxable Vanguard account for backdoor Roths and our taxable account split into 3 fund portfolio with 41/59 AA. I am very intrigued with an idea of TLH and want to open a Betterment or Wealthfront account (leaning towards Betterment). I know I can do TLH myself, but someone doing it for me would be much nicer . My question is should I transfer my Vanguard funds to Betterment or keep both since I need Vanguard for backdoor Roth anyway? I do have another ~200K sitting in checking account, so I have funds to start Betterment account without touching Vanguard funds. What do you think?

Click to expand…

Neither is worth it after-tax.  They do what’s called ‘tax loss harvesting’, and they do it so aggressively that it amounts to active trading.  This actually reduces your return compared to holding the same identical securities.  I’ve done some analysis of this.  The problem is that they constantly switch allocations so it is difficult to analyze, but from what I’ve seen I would never recommend an actively traded tax loss harvesting platform.  Bogleheads should know better.  There is a good reason why active trading is bad.  Tax loss harvesting sounds good in principle, but getting it right is impossible because sometimes you’ll be wrong and sometimes you’ll be right, but if you have to sell and buy constantly, the error (exit and entry point) simply gets bigger and bigger with time.  This is just basic stock market math.  It applies to actively managed funds, and to any strategy that purports to do tax loss harvesting.  While they MAY generate an alpha of 1% (I have seen analysis showing that this is wildly overstated), they will actually generate a NEGATIVE alpha due to their constant trading, which will more than negate any tax alpha that they might (or might not) generate.  Thus, the longer the horizon, the worse the performance of this strategy vs. a buy and hold strategy holding identical securities.  Nobody has looked at this yet, and in time, the truth will come out.

Click to expand...

I think for sure their generated alpha is likely overstated, that is in fact a marketing material type thing and should be expected. All the trading does make one likely to incur losses somewhere, but as long as the trading costs arent yours the biggest issue is with the company doing it incurring losses over time and it not being worthwhile to them. It will be interesting to see how these algorithms perform longer term, especially since at this time we are taking their word for it. I dont think the account with TLH is best seen as some amazing source of alpha in and of itself, but if used to balance against other capital gains that are now able to be harvested that would be valuable.

I dont understand how tlh is difficult though in concept or execution (using funds not individual securities), as its basically just using correlation to your advantage as well as pretty vague and lax definitions of "similar".

 

[litovskyassetmanagement]

jz wrote:

Kon,   what you do mean by this, ……….”they constantly switch allocations so …………”?

Click to expand...

They have two sets of ETFs to avoid the wash sale rules.  So their algorithm trades from one ETF into another and back again.

[litovskyassetmanagement]

Vagabond MD wrote:

Kon Litovsky wrote:

RJ wrote:

Hi everyone,

I am a faithful Boglehead and WCI follower. My wife and I are both employed physicians and fortunately have lots of pre-tax space including my 401K with significant company match, her 457, 403B and 401a (employer’s match). We put away ~ $90,000 pre-tax every year. In addition, we opened a taxable Vanguard account for backdoor Roths and our taxable account split into 3 fund portfolio with 41/59 AA. I am very intrigued with an idea of TLH and want to open a Betterment or Wealthfront account (leaning towards Betterment). I know I can do TLH myself, but someone doing it for me would be much nicer . My question is should I transfer my Vanguard funds to Betterment or keep both since I need Vanguard for backdoor Roth anyway? I do have another ~200K sitting in checking account, so I have funds to start Betterment account without touching Vanguard funds. What do you think?

Click to expand…

Neither is worth it after-tax.  They do what’s called ‘tax loss harvesting’, and they do it so aggressively that it amounts to active trading.  This actually reduces your return compared to holding the same identical securities.  I’ve done some analysis of this.  The problem is that they constantly switch allocations so it is difficult to analyze, but from what I’ve seen I would never recommend an actively traded tax loss harvesting platform.  Bogleheads should know better.  There is a good reason why active trading is bad.  Tax loss harvesting sounds good in principle, but getting it right is impossible because sometimes you’ll be wrong and sometimes you’ll be right, but if you have to sell and buy constantly, the error (exit and entry point) simply gets bigger and bigger with time.  This is just basic stock market math.  It applies to actively managed funds, and to any strategy that purports to do tax loss harvesting.  While they MAY generate an alpha of 1% (I have seen analysis showing that this is wildly overstated), they will actually generate a NEGATIVE alpha due to their constant trading, which will more than negate any tax alpha that they might (or might not) generate.  Thus, the longer the horizon, the worse the performance of this strategy vs. a buy and hold strategy holding identical securities.  Nobody has looked at this yet, and in time, the truth will come out.

Click to expand…

I am going to disagree. The TLH is done by selling the investment that is down and repurchasing an almost-but-not-quite identical EFT in the identical asset class, not tantamount to active trading, IMO. There is not all that much trading.

As for Betterment vs. Wealthfront, I prefer the small and value tilt of Betterment and prefer to avoid the Natural Resources allocation of Wealthfront.

Click to expand...

It all comes down to numbers.  There is just enough trading, and this has been examined in great detail by none other than Benoit Mandelbrot.  When you sell, you always get a lower price and when you buy, the same.  So when you have to buy and sell, you always end up with an 'error' vs. an investment that is held.  This is a known fact.  Even if they do two dozen trades a year, with large amounts, this stuff adds up really fast, and I have seen this effect.  I have about 3 years worth of trading data from them, and there is definitely a difference as much as I can tell.

Also, they don't use the best ETFs for each asset class, that's for sure.  They don't do 'day trading', but whatever trades they place to generate tax loss alpha really hurts the portfolio more than it helps.  Over time, their performance is guaranteed to lag the performance of the same portfolio that was not traded as often.  That's what I mean by 'active trading'.

[litovskyassetmanagement]

Zaphod wrote:

Kon Litovsky wrote:

RJ wrote:

Hi everyone,

I am a faithful Boglehead and WCI follower. My wife and I are both employed physicians and fortunately have lots of pre-tax space including my 401K with significant company match, her 457, 403B and 401a (employer’s match). We put away ~ $90,000 pre-tax every year. In addition, we opened a taxable Vanguard account for backdoor Roths and our taxable account split into 3 fund portfolio with 41/59 AA. I am very intrigued with an idea of TLH and want to open a Betterment or Wealthfront account (leaning towards Betterment). I know I can do TLH myself, but someone doing it for me would be much nicer . My question is should I transfer my Vanguard funds to Betterment or keep both since I need Vanguard for backdoor Roth anyway? I do have another ~200K sitting in checking account, so I have funds to start Betterment account without touching Vanguard funds. What do you think?

Click to expand…

Neither is worth it after-tax.  They do what’s called ‘tax loss harvesting’, and they do it so aggressively that it amounts to active trading.  This actually reduces your return compared to holding the same identical securities.  I’ve done some analysis of this.  The problem is that they constantly switch allocations so it is difficult to analyze, but from what I’ve seen I would never recommend an actively traded tax loss harvesting platform.  Bogleheads should know better.  There is a good reason why active trading is bad.  Tax loss harvesting sounds good in principle, but getting it right is impossible because sometimes you’ll be wrong and sometimes you’ll be right, but if you have to sell and buy constantly, the error (exit and entry point) simply gets bigger and bigger with time.  This is just basic stock market math.  It applies to actively managed funds, and to any strategy that purports to do tax loss harvesting.  While they MAY generate an alpha of 1% (I have seen analysis showing that this is wildly overstated), they will actually generate a NEGATIVE alpha due to their constant trading, which will more than negate any tax alpha that they might (or might not) generate.  Thus, the longer the horizon, the worse the performance of this strategy vs. a buy and hold strategy holding identical securities.  Nobody has looked at this yet, and in time, the truth will come out.

Click to expand…

I think for sure their generated alpha is likely overstated, that is in fact a marketing material type thing and should be expected. All the trading does make one likely to incur losses somewhere, but as long as the trading costs arent yours the biggest issue is with the company doing it incurring losses over time and it not being worthwhile to them. It will be interesting to see how these algorithms perform longer term, especially since at this time we are taking their word for it. I dont think the account with TLH is best seen as some amazing source of alpha in and of itself, but if used to balance against other capital gains that are now able to be harvested that would be valuable.

I dont understand how tlh is difficult though in concept or execution (using funds not individual securities), as its basically just using correlation to your advantage as well as pretty vague and lax definitions of “similar”.

 

Click to expand...

They can not predict the market, and their algorithms have no way of knowing the best time to buy or to sell because if they did, then they could generate untold profits.  I think they fooled themselves by believing that they can generate this phantom tax alpha while completely ignoring something that has been known for decades - their back-testing basically used market prices, not the fact that you will never get the actual market price when buying or selling.

I'm attaching an article by Michael Edesses who discusses many shortfalls of their claims.  If anything, the entire tax loss harvesting thing is completely overblown.  Michael Kitces agrees as well.

By the way, Bogleheads DO understand the perils of TLH (with reference to Kitces):

https://www.bogleheads.org/forum/viewtopic.php?t=132502

Basic math says that there we are practically guaranteed to lose money over time when constantly moving money from investment to investment.  The only question is, how much would that cost us long term?  It might be very significant - 1% or 2% or so on average a year (that's what my limited data has shown).

 

 

[Zaphod]

Kon Litovsky wrote:

Vagabond MD wrote:

Kon Litovsky wrote:

RJ wrote:

Hi everyone,

I am a faithful Boglehead and WCI follower. My wife and I are both employed physicians and fortunately have lots of pre-tax space including my 401K with significant company match, her 457, 403B and 401a (employer’s match). We put away ~ $90,000 pre-tax every year. In addition, we opened a taxable Vanguard account for backdoor Roths and our taxable account split into 3 fund portfolio with 41/59 AA. I am very intrigued with an idea of TLH and want to open a Betterment or Wealthfront account (leaning towards Betterment). I know I can do TLH myself, but someone doing it for me would be much nicer . My question is should I transfer my Vanguard funds to Betterment or keep both since I need Vanguard for backdoor Roth anyway? I do have another ~200K sitting in checking account, so I have funds to start Betterment account without touching Vanguard funds. What do you think?

Click to expand…

Neither is worth it after-tax.  They do what’s called ‘tax loss harvesting’, and they do it so aggressively that it amounts to active trading.  This actually reduces your return compared to holding the same identical securities.  I’ve done some analysis of this.  The problem is that they constantly switch allocations so it is difficult to analyze, but from what I’ve seen I would never recommend an actively traded tax loss harvesting platform.  Bogleheads should know better.  There is a good reason why active trading is bad.  Tax loss harvesting sounds good in principle, but getting it right is impossible because sometimes you’ll be wrong and sometimes you’ll be right, but if you have to sell and buy constantly, the error (exit and entry point) simply gets bigger and bigger with time.  This is just basic stock market math.  It applies to actively managed funds, and to any strategy that purports to do tax loss harvesting.  While they MAY generate an alpha of 1% (I have seen analysis showing that this is wildly overstated), they will actually generate a NEGATIVE alpha due to their constant trading, which will more than negate any tax alpha that they might (or might not) generate.  Thus, the longer the horizon, the worse the performance of this strategy vs. a buy and hold strategy holding identical securities.  Nobody has looked at this yet, and in time, the truth will come out.

Click to expand…

I am going to disagree. The TLH is done by selling the investment that is down and repurchasing an almost-but-not-quite identical EFT in the identical asset class, not tantamount to active trading, IMO. There is not all that much trading.

As for Betterment vs. Wealthfront, I prefer the small and value tilt of Betterment and prefer to avoid the Natural Resources allocation of Wealthfront.

Click to expand…

It all comes down to numbers.  There is just enough trading, and this has been examined in great detail by none other than Benoit Mandelbrot.  When you sell, you always get a lower price and when you buy, the same.  So when you have to buy and sell, you always end up with an ‘error’ vs. an investment that is held.  This is a known fact.  Even if they do two dozen trades a year, with large amounts, this stuff adds up really fast, and I have seen this effect.  I have about 3 years worth of trading data from them, and there is definitely a difference as much as I can tell.

Also, they don’t use the best ETFs for each asset class, that’s for sure.  They don’t do ‘day trading’, but whatever trades they place to generate tax loss alpha really hurts the portfolio more than it helps.  Over time, their performance is guaranteed to lag the performance of the same portfolio that was not traded as often.  That’s what I mean by ‘active trading’.

Click to expand...

I have no idea what the black boxes controlling WF/Bttrmnt are doing and will not defend them in the slightest, I am sure they are over selling it. They didnt fool themselves, it a marketing tactic. The only people possible of being fooled are investors who dont get what was expected.

That RA paper found a 17 bp gain, but complained about increased turnover, which if you're making a gain doesnt matter, unless you are overly concerned about costs in which case you're just with the wrong broker. Obviously if you are going to have more activity in your account you have to pay attention to these costs.

Like I said previously, using TLH just for a very minor 3k in income deduction per year is easily done and is very minimally beneficial as its so limited in its ability to do much at all, theres not really any alpha. Not sure taxes qualify as an alpha either. The only major benefit would be pairing it to capital gains of some nature.

Again, not advocating this daily thing, but its not that hard to see when their algorithms would say sell. If the current price
I dont understand the late in life tax basis issue, which is basically complaining that if you did too well, you'd be taxed more because you have more, well...yeah, one can only hope so.

It will be super interesting to see what happens with these services in 5, 10 years. Might be smart to invest in their market makers this is a lot of trading.