Betterment Analysis

I used the same techniques on my Betterment analysis. There were a couple of complicating factors. In the more aggressive scenario Betterment did not include an IRA option and they did include a municipal bond ETF in my allocation.  I dropped the tax free ETF and increased the other ETFs proportionally to cover for this missing ETF. Also Betterment changed some of the underlying ETFs a year or so ago. A couple of them were not in existence in 2008. These were also dropped in the initial 2008 allocations and only included beginning in mid 2013.

Following are the Betterment results with the preceding adjustments.

Reallocation Frequency	Betterment 55/45		Betterment 90/10
	From 2008	From 2011	From 2008	From 2011
No reallocations	$98,093	$99,845	$90,930	$90,930
Six months	$112,109	$127,007	$102,554	$133,427
Quarterly	$116,737	$131,277	$107,232	$138,141
Monthly	$113,352	$129,850	$99,288	$134,426
	Betterment 55/45		Betterment 90/10
Year	From 2008	From 2011	From 2008	From 2011
2008	-35.0%		-48.4%
2009	22.3%		32.0%
2010	11.8%		14.0%
2011	-2.1%	-2.1%	-7.1%	-7.1%
2012	13.3%	13.3%	17.5%	17.5%
2013	13.1%	13.1%	21.3%	21.3%
2014	6.4%	6.4%	7.6%	7.6%
Average Annual Return	4.3%		5.3%
Standard Deviation	18.85%		26.59%

Once again, reallocating quarterly led to the best results. It’s problematic to start in 2008, because there was a loss of a third to a half of the initial investment in the next fifteen months. Since then a pretty steady rebound has occurred. The average annual rate of return has been 4.3% and 5.3% (including the disaster in 2008). The standard deviations do show that the more conservative allocations tend to perform at a steadier rate, but produce lower returns.

 

WealthFront Analysis

I’ve learned several things in my early analysis, but there is more to do. So I’ve decided to publish some preliminary results. First, my analysis is initially in support of my reevaluation of my own investment strategy. I’ve been investigating these alternative approaches for their educational value and not necessarily something I am personally considering (but I might).

My first step was with WealthFront. I answered a few questions at their site and they responded with their recommended allocations for me. These identified specific ETF’s and the percent of my total portfolio cash that should be allocated to each. This recommendation included a risk factor (from 0 to 10) that could be changed to get different allocations. They also suggested allocations in taxable and non-taxable accounts. I concentrated on non-taxable and two risk factors. These were a conservative approach (risk 4.5) and an aggressive approach (risk 8.0).

I started my analysis with 2011 because I figured it would be more relevant to today. But the results were so good that I was a little concerned. Naturally the markets have been quite good during this period so almost all investment strategies look good. I decided to look a little farther back, starting with 2008. This is a worst case scenario since it includes the financial market meltdown. Now I have four scenarios, two strategies and two starting points. Following is some raw data assuming an investment of $100,000.

Reallocation Frequency	WealthFront - Risk 4.5		WealthFront - Risk 8.0
	From 2008	From 2011	From 2008	From 2011
No reallocations	$100,965	$127,693	$93,265	$128,288
Six months	$116,557	$133,520	$107,634	$134,217
Quarterly	$123,079	$138,910	$113,774	$139,637
Monthly	$124,332	$137,786	$109,566	$138,093
	WealthFront - Risk 4.5		WealthFront - Risk 8.0
Year	From 2008	From 2011	From 2008	From 2011
2008	-35.1%		-47.0%
2009	23.2%		32.4%
2010	13.3%		16.1%
2011	1.1%	1.1%	-2.3%	-2.3%
2012	14.0%	14.0%	16.3%	16.3%
2013	10.0%	10.0%	13.7%	13.7%
2014	8.4%	8.4%	9.5%	9.5%
Average Annual Return	5.0%		5.5%
Standard Deviation	18.9%		25.3%

A few quick observations are in order. First I built models with reallocations at fixed times. I was surprised that reallocating quarterly got the best results. So I used this approach in subsequent analysis. (Note: Neither company actually uses a fixed reallocation schedule. I will be developing a more complex approach later.)

Next, I looked at the annual rate of return. Clearly starting at the beginning of 2008 was a disaster. You would have lost close to half of your initial investment over the next fifteen months. Unfortunately many people would have bailed out during that time frame. That would have been a big mistake. Look at the average annual returns (including 2008). They are pretty good. They are certainly better than banks or CD’s. But I will discuss more on this later. The Betterment numbers will be posted soon.

 

Betterment and WealthFront

While doing research on Personal Capital I encountered a new (to me anyway) concept of online financial managers, also known as robo-advisers. Two of the more prominent are Betterment and WealthFront. At their web sites you can get a recommendation on how you should allocate your investments, based on your answers to a few questions. They will suggest what percentage of your investment should be put in each of 8-10 ETFs. These ETFs focus on stock and bond funds, both domestic and international. They use mainly Vanguard ETF’s because of the low fees.

They will ask if you want to sign up and deposit funds in your account, which are kept in a brokerage account.  They distribute the funds over the ETFs based on their allocation recommendations. Periodically they will re-balance the funds over the ETFs. You can learn more by doing an internet search for “Betterment versus WealthFront.”

These might be of interest to my “friends and family.” In particular, those of you who would like to get a higher return on the money that you have sitting in savings accounts or CD's.  These are automated processes and you won’t be dealing with any human beings. All is done with computer algorithms. They do charge fees, but they are relatively low. For those who don’t want to spend time managing your money, these are worthwhile.

I am in the process of analyzing the suggestions these two sites made for me and the returns from these allocations. I will be posting the results as I get them.

Personal Capital

The first stop in my new approach to investment was a website called Personal Capital. This is a financial adviser firm that offers some very nice online software. To use their free service, you create an account and enter all of your financial account information (including log on information and passwords). After your account is created, you are able to access all of your financial information and retrieve balances and recent transactions through their Personal Capital website

Personal Capital makes money by becoming financial advisers to some of the people who sign up for the free site. They contacted me and I had a couple of video conversations with one of their advisers. The presentation was quite good. They analyzed my investments and made some general recommendations. They recommended that I set up a financial account with them and move some of my money there to allow them to manage the investments. They would allocate these funds over domestic and international stocks and bonds. They use ETF’s for most of these, but mix in some individual stocks. This is pretty much the way I have and will continue to invest.

They do charge a fee for these management services. In my case it would be about 0.9% of the balance annually. That’s typical for human financial advisers. In my case, this fee is too high because I’m more than happy to manage my own investments. As a result, I won’t be using their advisory services, but I will continue to use the free site.

However, I did some analysis on the data in their presentation. My conclusion was that they would have done a better job in the past with my investments than I did. As a result, I recommend that people with significant funds who are willing to pay someone else to manage their investments consider this service.

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Introduction

My name is Bill Lanke and I'm 70 years old. I have been retired for more than a decade. I am very happily married to Sandra for more than 40 years. We have two daughters and three grandchildren. We split our time between Florida and Indiana. We live off of our investments and Social Security.

I have been an active trader of stocks and ETF's over the last few years. I have an account at Fidelity where I do most of the trading. I also have an account with TIAA/CREF. I have never paid much attention to this account, and recently, after reviewing some of the results that I've achieved, I've decided to change my approach.

I am doing some financial analysis to inform these changes. I have encountered some investment alternatives that I feel could be useful to my friends and family, so I am going to document my findings on this blog. Anyone who is interested can follow my journey.