Is investing in a robo-advisor platform with stocks priced this high a bad idea?
I am considering opening an account with Wealthfront in order to force myself to invest with the proper portfolio allocation. I am 22 and have approximately $115K in a savings account earning 1% (it was in a vanguard money market) and $20K in 4 vanguard funds (mid cap growth, emerging markets, international value, and short term investment grade bond). I am scared to invest in Wealthfront where the majority of the money will probably go into S&P stocks at current high prices. I am tired of seeing how much money I have lost by not investing in the market. Should I continue looking for better values in other funds and not worry what my asset allocation looks like? I am considering adding to emerging markets, developing markets, high dividend yield, and maybe an energy or health care ETF.
Thanks for the question. Investing is dependent on future goals and time horizon for the most part. As a 22 year old, I would imagine your investing goals would be for long term appreciation. Since you have time on your side, I wouldn't be too concerned about where the market is today. We have seen time and time again markets make new highs and although this may not be true going forward, the odds are highly in your favor they will over the next 20-30 years. Obviously, there is more to that and to help you answer your question for your personal case, you would want to consult with an investment advisor. In a nutshell, I am biased as an investment advisor and would say to avoid the robo platform. The best thing may be to invest in exchange traded funds on a systematic basis. Buy 10% of your portfolio over the course of 10 months and take advantage of dips in the market. Buy ETFs in all different categories and even though you may invest in the S & P 500, we are a global economy and names like Mc Donald's, Apple, and Procter and Gamble have international diversification embedded in their company's individual markets. Income from dividends are great too. You can find many different low cost stock ETFs that have yields of 3-4%.
Good luck and I hope this was helpful!
Great question! First off I think your worry about investing all of your cash at this point is warranted. The rally may have legs or may not - there is no crystal ball! As far as your asset allocation goes - YES you should worry about what it looks like. Most studies attribute the majority of long term performance to what your asset allocation looks like.
As far as investing with wealthfront - from my experience the robos do a pretty good job in breaking down your assets into various asset classes. If you dig a little deeper, you may actually see that they use some of the same holdings that you already own in your portfolio or something that is quite similar.
I would suggest you set a monthly amount you want to invest from your savings and dollar cost average the cash you plan to invest into your portfolio (with wealthfront or on your own). This way if the market continues to rally, you'll see some gains. If it reverses course, you'll just be buying more shares each month on the way down.
You have some very good points and you are doing well by asking some quality questions. In terms of the robo-advisor platform, take into strong consideration not working with a close financial advisor for ongoing concerns and questions. The robo-advisor platform is very new and has not shown a long-term track record of outperforming an actively managed account by a quality investment group or advisor. Fees are not the major drag on an account, but rather is more dragged down by poor investment management, and more importantly, taxes. With changes to the retirement planning and investment landscape almost daily, working with a quality financial advisor will help you and save you time, money, and stress over the long term.
In terms of how to invest, you have some good ideas for better diversification. With your existing 20K portfolio, you have significant diversification. Your consideration for adding to your other choices are well-defined as well. I would not "be scared" to invest at high prices as the market tends to describe itself as overbought or oversold too often. The key to growth in the market is "time in the market," not "timing the market." You will lose money from time to time, but over time, the market is designed to go up. Put more money to work and over time you will win.
An ETF is an excellent choice for sector diversification and low cost. If you are looking for low fees, an ETF menu is a great way to work with a quality financial investment advisor, get their ongoing service, and have low cost investment choices.
Hope this is helpful and if you have further questions, do not hesitate to let me know.
Jason R. Tate, ChFC, CLU, CASL
You state you are considering Wealthfront to force yourself to invest in a proper portfolio allocation. There are three points to consider. At a return of 1% per year, it will take 218 years to grow that to $1 million. At 5%, it will take 45 years; at 10%, 23 years; and at 15%, 16 years. The first point to consider is that performance of your investments make a big difference in building wealth. The second point is it takes time to build wealth.
Portfolio allocations as you have in Vanguard generally will under perform. Suppose hypothetically one fund average 9%;, one 8%; one 7%; one 2%. If you allocate an equal amount to each and rebalance, your return will be (9+8+7+2) = 6.5%. Over the next 25+ that is a significant reduction in what you earn.
The truth is making money in the stock market is buying low and selling high. But there is nothing in that phrase about timing. Stocks may be highly priced at this time. But will those same stocks at today’s prices look like they were purchased at low prices in 10, 15, or 20 years. Take an example of stocks like Apple or Alphabet or Starbucks or any number of other stocks. There were times 17 years ago when they looked expensive. But given their current price, don’t they look cheap 17 years ago? Since then they have gone through the Dot-com bust and the Great Recession. That price 17 years ago looks cheap.
I disagree with the tactical approach to investing (trying to time the market). Peter Lynch and John VanderHeiden published a study showing that missing just the ten best trading days in the ten years 1981-1991 would have cut returns from an annual 14% to 4%. That is an average of just 1 trading day per year. Carla Fried (Money 2008) repeated that study and found $10,000 invested in the S&P 500 in 1982 would have grown to $93, 075 by the end of 2001 (11.8% annualized). Missing just the best 30 trading days (1 ½ days per year) would have reduced that to $28,144.
It is true that if you can miss the worst days you can significantly improve performance, but then you have to guess when the worst days will be.
There is one other point. Yale Professor Richard Foster has said the average life of companies in the S&P 500 in 1920 was 70 years. Today it is less than 20 years. Changes are happening much faster today and the leadership companies are changing faster.
Finally ETFs have been around for less than ten years. They have a very limited track record when compared to the S&P 500. It is very difficult to beat the S&P 500 over the 5 to 10 year time period. Eugene Fama who shared the Nobel Prize in 2013 said there were fewer than 7% of professional money managers who were able to do it. It is not difficult to find those managers who do so.
Concerning Wealthfront, I believe the robo-advisor is going to be a very significant player in the financial markets and they are going to be less expensive than financial advisors and will not have that much difference in total performance.
But I have to ask this: why not find a financial advisor who will manage your account on a profit sharing basis? If you are losing money in your account you will pay nothing. You will only pay on the profits. Why not email financial advisors asking if they will manage a $115,000 account on a profit sharing basis? That is not a fee based on assets in the account but an actual sharing of the profits.
Great Question - it comes down to your belief in strategic allocation or tactical investing, understanding cyclical nature of boom an bust cycle, and how FED policy has manipulated interests for the last 40 years. Robo advisors offer a strategic allocation, typically anywhere from 15 to 25 asset classes. A global tactical portfolio will over weight domestic vs. international, large vs. small, value vs. growth, stock vs bond vs cash vs. gold vs. other items, that can be change at anytime based upon trend aggregation models or methods used by the portfolio manager. The next big recession will be interesting for those who don't have an sell discipline or exit strategy.
Do a lot of research, does the wealth front advisors have their own money in their strategies? Ask them to see their statement? Read up on some of the great investors over the last 40 years. Indexing through ETFS, can be offered in both strategies, which has a lot of supporting evidence over active mutual fund management. Hope this helps!
Most independent RIAs, acting as a fiduciary will be able to answer these questions in detail, and possibly be able to cover a whole range of financial topics as they come up in your life.