Comments on: Is there something better than Vanguard?

By: Rudy200

Rudy200 — Thu, 15 Nov 2012 06:28:37 +0000

I checked the WealthFront site, and in 2008, 5 of their investment categories sank in tandem with the market. Only one of the six, the bond fund, increased in value. So I don’t understand the value of diversification in preventing investor panic when there is a market crash.

By: sipples

sipples — Wed, 14 Nov 2012 10:18:21 +0000

You don’t need a tax loss harvesting strategy in a 401(k) (or other tax-advantaged account) if you make qualified withdrawals.

However, 401(k) contributions are ordinarily capped at $17,000 (tax year 2012) for those under age 50. You may or may not be able to contribute an additional $5,000 to an IRA (Roth IRA, for example) — somewhat more if you’re older — depending on your income. Some people are able to save more than these limits, in which case they could benefit from tax loss harvesting. And many people save for reasons other than retirement. So while tax loss harvesting isn’t useful for everyone it is useful for many.

By: f.fursty

f.fursty — Wed, 14 Nov 2012 06:11:29 +0000

But why would you need a tax loss harvesting strategy for a retirement fund that is, presumably, in a 401K?

By: mfw13

mfw13 — Wed, 14 Nov 2012 02:52:11 +0000

The real questions that nobody is discussing are the following:

1) How can you target a specific date when nobody knows when they will retire or how long the will live?

2) Is diversification (both of risk and asset classes) still truly possible when the entire world economy is becoming more and more linked as each day passes?

Also, have to second (and third) TFF’s comment….too many people manage for return without managing for risk.

By: dsquared

dsquared — Tue, 13 Nov 2012 07:08:08 +0000

“when Wealthfront CEO Andy Rachleff launched into his spiel by telling me how deeply his firm’s philosophy was rooted in Modern Portfolio Theory, I didn’t exactly light up with enthusiasm”

“Modern Portfolio Theory” is about as modern these days as Art Nouveau is new. Ask Taleb what he thinks about it – it’s a theory of portfolio diversification based on the existence of stable correlations and beta factors, which is why I would be very, very very suspicious of those drawdown charts and claims to have carried out tail hedging.

By: qianliu

qianliu — Tue, 13 Nov 2012 07:00:42 +0000

Hi I lead the development of the tax-loss harvesting strategy at Wealthfront. Just want to clarify how we swap ETFs — When we detect a harvesting opportunity, we sell the ETF at loss and buy another ETF that tracks a different but highly correlated index. The consensus among the tax experts we consulted is that ETFs tracking different indices are not “substantially identical” as far as IRS wash-sales rule concerns. For example, for US equity, one can swap between Russell 3000, MSCI US Broad, FTSE US and others. These indices are different but highly correlated with correlation approaching 1.0. The diverse indices as well as the ETFs tracking them in the market made this strategy possible. For more details please refer to our white paper: https://www.wealthfront.com/whitepapers/ tax-loss-harvesting

Best,
Qian Liu, PhD, CFA
Wealthfront

By: TFF

TFF — Tue, 13 Nov 2012 02:08:55 +0000

Heh… There really wasn’t any place to hide in 2008! Looking at those dates, my own stock investments fell nearly 50% along with the market.

Guess I was too busy buying more to take notice at the time. :) Not nearly as much fun if one is near retirement when it happens.

By: absinthe

absinthe — Tue, 13 Nov 2012 00:18:00 +0000

Careful offering tax advice there – I don’t think the IRS has come down on whether swapping between ETFs that track the same index actually avoids wash-sale rules. “Substantially similar” securities should not be used for tax harvesting.

By: nisiprius

nisiprius — Mon, 12 Nov 2012 23:38:03 +0000

“Now we all just went through the financial crisis: we remember exactly what it feels like to lose 40% of your money. It’s not nice. And so Pimco spends some serious money — somewhere between 15bp and 50bp per year — on tail-risk hedging. As a result, says Bhansali, when stocks fall by 50%, his funds will only fall by 20% or 25%. Which is a key level, because research shows that when people lose more than 30% of their money, they tend to panic and sell.”

There’s one small problem. Between inception, 2/28/2008, and 2/28/2009, when Vanguard Target Retirement 2040 dropped by 40.5%, Pimco RealRetirement dropped 38.0%.

That’s not “20% or 25%.”

By: ronsurz

ronsurz — Mon, 12 Nov 2012 22:35:37 +0000

Tthe benefits of target date funds are diversification and risk control (professional management). Both could be better.
• Diversification is inadequate because most TDFs are predominately US stocks and bonds. Some TDFs have recently touted reduced fees, but be careful. Low fees equate to low diversification since diversifying assets command a high price, namely commodities, real estate, natural resources, foreign stocks and bonds, etc.

• Similarly, TDFs are too risky. We learned this lesson in 2008 when the typical 2010 fund lost 25%. Nothing has changed since so the vulnerable remain exposed to large losses as they near retirement, which is shocking.

By: Hippopotamax

Hippopotamax — Mon, 12 Nov 2012 20:05:20 +0000

I would strongly advise not to sell one S&P 500 index fund and immediately buy another S&P 500 fund a a loss-harvesting strategy. The IRS hasn’t yet made a definitive ruling, but it seems like the “substantially identical” standard in the wash-sale rule includes funds based on the same index.

By: TFF

TFF — Mon, 12 Nov 2012 19:36:39 +0000

“But there’s more to investment than maximizing returns”

Best point you’ve ever made about investing! (Which is why matching or beating the index is not the goal.)

These offerings are definitely intriguing.

By: klhoughton

klhoughton — Mon, 12 Nov 2012 18:39:55 +0000

“That’s partly because no one is agreed on how much stock-market exposure investors should have when they retire: in a world where retirement can last for decades, it’s surely substantial.”

I’m failing to follow your reasoning here. In retirement, preservation of capital–or its orderly drawdown, absent bequests–is key. This strongly suggests that risk aversion should be near-total. So long as s-t Treasuries cover inflation, to only portion that should be in equities is that portion that would otherwise be a bequest.