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  • #16
















    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?
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    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.
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    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.
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    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’.
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    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.
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    The tax hit with a tax-efficient portfolio is ~0.3% a year for someone in the highest tax brackets.  Robos chargee ~15-25 bps and their fund expense ratio is not the lowest.  I'd say stick to a buy and hold allocation and call it a day.  I can't justify paying asset-based fees for this type of service.  Someone with $1M+ in assets will be paying a lot of money for not much advice at all.  If someone wants to play this game, set up three portfolios: one at Vanguard (buy and hold), one at Betterment and one at Wealthfront.  You can also look at the taxes you have to pay in each one.  Eventually there will be a winner.

    I don't mind robos.  In fact, I would love to get access to their platform to implement low cost ETF allocations without any of the TLH gimmicks.  And without any asset based fees.
    Kon Litovsky, Principal, Litovsky Asset Management | [email protected] | 401k and Cash Balance plans for solo and group practices, fixed/flat fee, no AUM fees

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    • #17
      Thank you so much everyone for your input. Here is another question for the gurus: since I have a 3 fund portfolio (mutual funds) with Vanguard and will have lets say Betterment account (ETFs), do I have to worry about wash sale rules when Betterment rebalances my portfolio?

       

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      • #18




        Thank you so much everyone for your input. Here is another question for the gurus: since I have a 3 fund portfolio (mutual funds) with Vanguard and will have lets say Betterment account (ETFs), do I have to worry about wash sale rules when Betterment rebalances my portfolio?

         
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        At the very least, they should take care of this.
        Kon Litovsky, Principal, Litovsky Asset Management | [email protected] | 401k and Cash Balance plans for solo and group practices, fixed/flat fee, no AUM fees

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        • #19
          Very interesting discussion. I'm a resident somewhat new to the game, so some of this discussion is beyond me. But hearing things like "black box", "asset-based fees", and automated "algorithms" starts firing my "spidey sense" and raising the skeptic's red flags. This seems to go against the general principles of understanding your investment vehicle and minimizing complexity. Would be interested in hearing WCI's take on this who I believe has been a huge proponent of TLH over the years; to the point that I wasn't even aware it was a controversial technique.

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          • #20




            Very interesting discussion. I’m a resident somewhat new to the game, so some of this discussion is beyond me. But hearing things like “black box”, “asset-based fees”, and automated “algorithms” starts firing my “spidey sense” and raising the skeptic’s red flags. This seems to go against the general principles of understanding your investment vehicle and minimizing complexity. Would be interested in hearing WCI’s take on this who I believe has been a huge proponent of TLH over the years; to the point that I wasn’t even aware it was a controversial technique.
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            TLH is not controversial at all. WF/Btrmnt algorithms and their purported alpha over a standard buy and hold are definitely controversial since if true it would make an incredible difference in your account value over 30 years or so.

            Gives money that would be used for taxes today the ability to work in the market, compound, etc....then pay those taxes in the future (hopefully more). The explanation of that is at the bottom of that Kitces article.

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            • #21




              Very interesting discussion. I’m a resident somewhat new to the game, so some of this discussion is beyond me. But hearing things like “black box”, “asset-based fees”, and automated “algorithms” starts firing my “spidey sense” and raising the skeptic’s red flags. This seems to go against the general principles of understanding your investment vehicle and minimizing complexity. Would be interested in hearing WCI’s take on this who I believe has been a huge proponent of TLH over the years; to the point that I wasn’t even aware it was a controversial technique.
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              Not at all - not controversial.  The way some practitioners use it is indeed not guaranteed to produce an alpha.  For example, some advisers sell securities every year to try to do TLH - this goes against the buy and hold philosophy (and rightly so - doing this is not guaranteed to produce an alpha).  However, if there is indeed a legitimate TLH opportunity, we can easily calculate the benefit.  This is the same thing as trading.  You can trade to buy a bunch of ETFs for your buy and hold portfolio, or you can trade based on algorithms.  Algorithmic trading has been known for decades, and there are many studies that shows no consistent alpha, for example here:

              http://www.farmdoc.illinois.edu/marketing/agmas/reports/04_04/AgMAS04_04.pdf

              This is just another example of algorithmic trading taking something to extreme.  For one thing, backtesting is completely useless to determine the alpha of this strategy.  They have to use assumptions in their favor, and I bet that they are not even tracking their actual portfolio return vs. buy and hold.  Somehow everyone just accepted their word for it.  Just remember one thing.  When it comes to the markets, most of the stuff published ranges from false to completely false, and such grandiose statements as 'invest with us and we'll generate an alpha for you' are simply too good to be true.  I still can't believe SEC would allow them to sell their unproven theories based on bad models to the public.  However, every hedge fund and then some uses such models, and spends lots of money on them.  I don't believe they are allowed to market their predictions based on models and past history though.
              Kon Litovsky, Principal, Litovsky Asset Management | [email protected] | 401k and Cash Balance plans for solo and group practices, fixed/flat fee, no AUM fees

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              • #22
                Thanks for clarifying. Yes, makes sense.

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                • #23
                  OP here. So I broke down and put some $$$ into Betterment last night. Wish me luck!

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                  • #24




                    OP here. So I broke down and put some $$$ into Betterment last night. Wish me luck!
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                    Retirement planning is all about risk management and planning.  It can be quite boring, and should not involve (much) luck ;-)
                    Kon Litovsky, Principal, Litovsky Asset Management | [email protected] | 401k and Cash Balance plans for solo and group practices, fixed/flat fee, no AUM fees

                    Comment


                    • #25







                      OP here. So I broke down and put some $$$ into Betterment last night. Wish me luck!
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                      Retirement planning is all about risk management and planning.  It can be quite boring, and should not involve (much) luck ?
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                      Agree...but the greater factor of good planning is the behavioral piece, committing the money to the investments, not to the luxury goods. You can achieve financial independence much sooner adding an extra $750/month to your Betterment account than diverting it to your Lexus dealership.

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                      • #26
                        IMHO it's all about balance. If you have an emergency fund, maxed out your pretax space, happy with your mortgage situation, got all your insurances lined up and comfortable with monthly contributions to your taxable account, why not get a Lexus? We all work very hard and one never knows what will happen tomorrow. Case in point: I am a specialist, one of my regular referring PCP in his early 40s developed a brain bleed during the flight to a conference. Only known pre-existing issue was high blood pressure. Unfortunately, now we are talking not being able to hold his head on his own. Very very tragic. So, yeah, maybe a little Lexus while you can is not such a bad idea...

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                        • #27




                          IMHO it’s all about balance. If you have an emergency fund, maxed out your pretax space, happy with your mortgage situation, got all your insurances lined up and comfortable with monthly contributions to your taxable account, why not get a Lexus? We all work very hard and one never knows what will happen tomorrow. Case in point: I am a specialist, one of my regular referring PCP in his early 40s developed a brain bleed during the flight to a conference. Only known pre-existing issue was high blood pressure. Unfortunately, now we are talking not being able to hold his head on his own. Very very tragic. So, yeah, maybe a little Lexus while you can is not such a bad idea…
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                          I have owned inexpensive cars, and I have owned expensive cars. I can comfortably afford to drive any car I can imagine, but I find that I am much happier driving an inexpensive car and using discretionary money for activities and travel. Studies have shown that buying stuff does not create as much happiness as buying experiences. I would rather have my brain bleed hiking in the Rockies or the Alps than stroking out while driving a BMW. Better to take more time off and chill than drive one's Lexus from hospital to clinic to ASC to ... As they say, YMMV ("Your mileage may vary.")

                          PS What mortgage?

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                          • #28
                            Mortgage is something I used to deduct $50 K off my taxes lol. Any car you can imagine ha? Wow, I wish I could write a $2,000,000 check for Bugatti Veyron.

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                            • #29




                              Mortgage is something I used to deduct $50 K off my taxes lol. Any car you can imagine ha? Wow, I wish I could write a $2,000,000 check for Bugatti Veyron.
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                              You obviously live in a much more expensive house than I do, and my imagination is obviously not as vivid as yours. I have never heard of that Bugatti thingie.  I guess when you live in a big money house, there are a lot of garages to fill, neighbors to impress, etc. It's a better deal to not pay mortgage interest. The hook of deducting the mortgage interest is a con.

                               

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                              • #30
                                Nope, nope, live in a condo actually. Bought at the right time and it appreciated ~40% in 2 years. But its in the best school district in town. No garages to fill, but I have 2 parking spots. You should research Bugattis- it's live car art.

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