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.