In Episode 10, we talk about the pros and cons of using a robo advisor. Are the advantages of automating your portfolio management worth the costs and downsides?
What you’ll learn in this episode:
- What are robo advisors
- Pros and cons
- How much robo advisors cost in fees
- What parts of your portfolio robo advisors don’t work for
- How to think about robo advisors vs. human financial advisors
- Ultimately, should you use a robo advisor?
Don’t miss an episode, hit that subscribe button…
Have you subscribed to the HYW podcast? Subscribe today so you don’t miss an episode! Click to subscribe in:
I need your help, please leave a listener review 🙂
If you liked this episode, I’d be totally grateful if you wouldn’t mind taking 99 seconds to leave me a quick review on Apple Podcasts, Spotify, Google, or wherever you listen to podcasts.
It’d mean the world to me and your review also helps others find my podcast, too!
For Apple Podcasts: Click here, select “Ratings and Reviews,” and then “Write a Review” to let me know what your favorite part of the podcast is.
Links mentioned in this episode:
- List of robo advisors
- Tax loss harvesting and tax gain harvesting step by step
- HYW private Facebook community
Read this episode as a post:
Okay, finance friends, welcome back to another episode of the Hack Your Wealth podcast.
I am excited about today’s episode because I think you’re going to find it pretty interesting.
We’re going to talk about robo advisors. Some of you probably already know what robo advisors are. And for others of you, it may be a totally new concept.
And so I want to spend some time talking about what robo advisors are what some of the pros and cons and trade offs are of using one.
What advantages do they offer? And what are some of the downsides? To help you understand: should you use a robo advisor as part of your wealth building strategy or investing strategy? How much do they really cost and fees? And how should you be thinking about robo advisors relative to human financial advisors?
So I think this is a really relevant topic, because a lot of you listeners are high earners with a good amount of disposable income that you want to invest into return generating assets.
And you want to know, what are all the techniques and tools available to you out there to be able to make the best investing choices you can.
And certainly, robo advisors have come onto the scene in a big way over the last five or six years in particular.
So what really are they all about? And are they worth looking into and considering?
We’re going to answer all those questions in today’s episode, but before we get to that, I want to invite you to join the Hack Your Wealth private Facebook group. You can find it at hackyourwealth.com/fb.
I really encourage you to go check it out. It’s a way for us to connect and have a two way dialogue. I’m in there every single day and I tried to respond to every single question and comment.
There are people who ask about financial independence and early retirement, real estate investing and tax strategies, side hustle income, online income, career transitions, and just asking for general advice about how to be strategic in your financial planning and tax planning.
So definitely want to encourage you to check out our Facebook group. It is a place where you’ll find a community of like minded wealth hackers who are smart and strategic and savvy and helpful and friendly and just all around good people.
So check that out: hackyourwealth.com/fb.
Okay, before we get to the heart of today’s discussion on robo advisors, I want to start with a quick story that will help set the stage for things.
So a couple of years back, I took my wife on a vacation trip to Paris. Beither of us had ever been.
It’s one of the most romantic cities in the world, and we wanted to go and we were planning what our itinerary would be for the approximately week that we would be there.
And there were a lot of itineraries we considered. Many of these travel guides will offer suggestions for tour itineraries. They will have a tour if you only have three days available, or if you have five days to spend, or if you have a week or even two weeks.
And we looked at all those and they all looked good. They would have taken us to all the famous landmarks and attractions, and we wanted to see those because neither of us had been there before. So we thought about just following one of these itinerary route suggestions.
But as we got closer, we decided, let’s actually take a closer look at what other people are saying about how to best experience Paris as a whole….and not just from the major blogs or guidebooks that are giving you a preset itinerary based on how many days you have on the ground.
And so we looked deep in forum chats online, we looked beyond the first or second or third page of the Google search results.
We took time to ask people who had been to Paris several times and who were familiar with the city for their recommendations, especially for restaurants and pastry shops and things like that.
And even when we were actually there, we also asked locals for their recommendations on restaurants and different cafes and things like that.
And because we spent quite a lot of time ultimately actually researching different things, some of our best and most memorable experiences actually came from this extra deep dive research we did that we never would have really gotten from the preset itineraries suggested by the major blogs and guidebooks.
I remember, for example, on several days we were there, we just took sunset walks on the Seine, which is the major river in Paris, and we would stand on one of the bridges across the sun and just watch the sunset go down and watch people taking evening strolls and boats going down the Seine.
And I just remember that being such a beautiful, beautiful scene. Even to this day, it still stays in my memory.
I remember having my birthday dinner at a really lovely restaurant.
It wasn’t one of those super world famous restaurants. Probably wasn’t even in the top 200 restaurants in Paris, according to so called food experts.
But I just remember my wife had found that restaurant through a lot of diligent research, both online and from asking for recommendations from peers and colleagues.
And our experience eating there was so delicious and homey and intimate that it was truly one of the highlights of our trip.
I remember getting fresh croissants each morning that had just come right out of the oven at that patisserie right around the corner from our hotel that were the puffiest, flakiest, warm buttered croissants I think I’ve ever had.
And each of these memories and experiences, whether it was watching multiple sunsets over the Seine, or a wonderful birthday dinner, or just the simplicity of being able to get these wonderfully tasty and eternally French croissants each morning – each of these experiences and memories was not something we had seen in any of the preset itineraries that were recommended for week long travelers.
They were all things we found by going deep in our research down various nooks and crannies, both looking online and asking for recommendations that led to these really nice memories that have stayed with us ever since.
And I tell this story because it actually sets an important tone for today’s discussion around financial advisors and robo advisors.
Because there’s often an easy way to do things that will get you one set of results, even though those results may not be the optimal ones.
We could have taken the easy way and followed one the guidebook suggestions, which is perfectly fine: you’ll see the important sites and attractions by doing that, but they may not actually give you the best experience, the most optimal travel experience that you would appreciate and remember long afterward.
Instead, there’s sometimes another way to do things that involves maybe a little bit more effort, a little bit of extra diligence, but can be far superior, and even life changing if you just take that extra bit of effort.
And that is also true when it comes to portfolio management. And that’s really what today’s episode is about.
It’s about how you can take a certain kind of shortcut, namely investing your money with a robo advisor, and that can give you okay results, but costly results, and how you should really understand those costs versus the alternative that may take a little bit of extra effort and diligence, but can give you equally good returns for far cheaper cost.
And how it’s important to make that decision in a very intentional way based on what you are optimizing for.
Okay, so let’s start first with the basics.
What exactly are robo advisors?
In the simplest terms, a robo advisor is just like a human financial advisor of the old days except the execution of investment management is handled by a computer.
In the old days, a human financial advisor would actually manage your money for you. You would literally go to her office and deposit a check at her office and she would discuss with you your financial goals, risk tolerance, any timelines that were relevant to your goals, and then she would go and invest your money on your behalf to try to meet those goals.
And in return for her services, she would take a 1% fee roughly from your assets every year.
A robo advisor does the same work, but instead of a human figuring out what investments to put your money in, you write a check and deposit it with the robo advisor and then the computer figures out what to invest in on your behalf.
The main robo advisor companies today are Wealthfront and Betterment. And we’ll get to more details about each of them a bit later.
But first, I wanted to give you some ways to think about the similarities and differences between robo advisors and human financial advisors in terms of their offerings and service levels and cost.
With human financial advisors, you’re going to get more human interaction, obviously. You’ll be able to ask questions, you’ll get their perspective on investments and the financial markets.
And that is not really the business model of the “set and forget” robo advisors.
With a human advisor, you’re going to get more direct, immediate on demand sort of customer support. But on the flip side, you may actually find that your human financial advisor is frankly not all that knowledgeable and may not be actually sophisticated enough to manage your portfolio as efficiently as a computer, as a Wealthfront or Betterment might do.
And they will undoubtedly be more expensive because they charge a much higher fee than robo advisors do. It’s human labor after all. And robo advisors themselves already charge super high fee.
On the other hand, if you have a very large portfolio, a human advisor, while more costly, will actually provide more service to you as a high net worth client, because they can offer you bespoke services and access to certain investment opportunities, if you are investing a lot of money with them.
And so, before we dive into the services and fees that are applicable to robo advisors, let’s just take a look at what kind of services and fees human financial advisors really offer and charge.
The standard in the human financial advisor industry is to charge 1% of assets under management, but that depends on what segment of the market that advisor is targeting.
So at lower dollar amounts, for clients who have portfolios that are in the $200,000 range, the percentage fee will generally be higher – maybe something like 1%.
But for large dollar amount clients who have portfolios, say, in the millions, or even the 10s of millions of dollars, the percentage fee is going to be smaller, because the absolute number of dollars is bigger, and the nature of the work between the $200,000 advisor and the $10 million advisor isn’t so fundamentally different that they can each justify charging 1%.
Also, for both types of advisors, there’s likely to be some kind of pricing tier that ratchets down in percentage points as you increase the assets under management, the AUM.
So for the $200,000 portfolio advisor, they might take a 1% on the first 200,000 and then a smaller and smaller percent as you add more and more money to your portfolio with them.
And likewise, a $10 million advisor may start with a smaller percentage because they are still collecting a large number of absolute dollars and then if you add more and more dollars on top of that, that percentage falls even lower still.
By the way, if you ever decide to hire a human financial advisor, I encourage you always to ask them two questions.
One, ask them, are you my fiduciary? And are you operating under a fiduciary standard when you deal with me?
Believe it or not, it is not a legal requirement or an industry professional ethics requirement to actually be a fiduciary as a financial advisor to a client, even though it seems insane to me to have it any other way.
And so it is actually on you, the client, to explicitly ask: Are you my fiduciary? And are you operating under a fiduciary standard when you deal with me?
If they waffle on that, if they basically give you any answer other than a resounding “yes, I am your fiduciary” then you walk away.
Second question you want to ask is: how exactly do you get paid? Make them explain to you all the ways they get paid.
Some advisors which are called fee-only or fee-based financial advisors will only charge you by the hour for their advice.
So they have no inherent conflict of interest because they’re just selling their advice and expertise, but it’s actually your job to go and take action and implement your investments.
Other financial advisors will take a percentage of your AUM, your assets under management, and usually that’s going to be around 1% for most people who have a sub $1 million portfolio.
And yet other financial advisors, the third group, is actually going to get paid a commission or a finder’s fee whenever they push certain financial products or investments to you, such as like shitty annuities.
And so you want to make sure you ask your financial advisor and make them disclose to you exactly how they are getting paid and ask them that point blank.
If you’re going to hire a human financial advisor, you definitely don’t want to go with the third type.
I generally only recommend working with financial advisors who are selling that advice on a fee basis only, and then it’s on you to go and implement the parts of the advice that you want to follow.
If you’re really timid, you can certainly go with the second type of advisor that actually charges you to manage your money, a percentage of your AUM, so long as they assure you they are operating under a fiduciary standard when dealing with you.
Please just do me a favor make sure you do not go with the third type of advisor, because they are literally incentivized to just sell you shit whether you need it or not…pardon my French.
So earlier, I mentioned this distinction between the financial advisor who services more of the mass market end of the spectrum, say, that $200,000 portfolio range vs. the high net worth end of the spectrum who’s servicing more like a $10 million portfolio.
And there are different services you get based on where you fall on the spectrum. If you’re closer to the mass market end, you might just get a once a year 30 minute in person consultation with your advisor, where they ask you about what’s changed, are your goals still the same, how do you want to rebalance things – which to me when you think about it when you’re paying 1% of your AUM each year to this person, this type of once a year, 30 minute service is basically organized theft, because you can just pay a fee only advisor and implement a strategy yourself for like a hundredth of the cost.
If you’re on the other end of the spectrum, or the high net worth end of the spectrum, your financial advisor is going to give you more service.
They’ll probably actually quarterback the coordination with all your other advisors like your lawyer, your CPA, your bookkeeper, which you’ll likely have all of those if you have that much net worth.
They’re probably going to be better educated than the more mass market.
There’s actually no real industry requirement to be a financial advisor. You don’t need any special credential or designation. Pretty much anybody can hang up their own shingle.
But on the higher end, you’re going to at a minimum have advisors who have a CFP, the Certified Financial Planner designation.
They might even have the more prestigious CFA, Chartered Financial Analyst designation, or a CPA or a JD, a law degree.
And they’re going to offer more value added services like they’ll be more proactive in helping you think about estate planning and tax efficient planning, they may introduce you to proprietary investment opportunities that they have for high net worth individuals.
These would be bespoke investments that they actually construct for you, maybe using a relationship they have with one of the big banks or an investment bank, etc. They’ll actually create these type of bespoke investment vehicles for you.
They may also be able to insource some of the related financial and estate planning services you would have otherwise purchased from another service provider – they may just actually throw that in for free.
They may call you every month with updates and news and just to see how things are going and how else they can just be adding value to you.
It’s going to be a lot more high touch white glove service when you’re on that high net worth end of the client spectrum.
Okay, so hopefully that gives you some lay of the land for how human financial advisors work, the differences between the mass market end of the spectrum vs. the high end market of the spectrum, and the differences in what they charge and the kind of services you’re going to get.
Now, let’s talk about robo advisors in relation to that. And what are some of the advantages and downsides of using robo advisor.
And let’s start with some of the advantages.
So a robo advisor is a technology company where you deposit your money with them and they’re going to help invest that money for you.
And one of the big advantages they bring is that they can do things like automatic rebalancing for you. And they can do that continuously, maybe even daily, in a tax efficient way.
Whereas a human financial advisor obviously is not going to do that. They don’t have the time to actually dedicate to doing daily reallocation and rebalancing for you.
And certainly, if you’re trying to do that yourself and you’re trying to buy and sell your own investments every day to continuously reallocate, you’re going to be paying some hefty short term capital gains taxes, and transaction costs and fees to do that.
And so one of the big advantages that a robo advisor brings is that they can just do this computationally, very cost efficiently on their side.
They will also help you do tax loss harvesting automatically. This is one of the big benefits that they sell.
Both the major companies Wealthfront and Betterment both offer this. And specifically, Wealthfront’s tax loss harvesting product essentially recreates the total market ETF, but they do so by actually buying and selling every single stock in the S&P 500.
And instead of tax loss harvesting when the entire ETFs as a whole goes in the red, instead what they do is they get very micro granular and tax loss harvest every single individual stock they buy rather than the blended index as a whole.
So if you were to go and buy the vanguard VTI ETF, which is the total stock market index, and you wanted to tax loss harvest, you would just see when the share lots you purchased on a particular day, if and when they dipped in the red, then you would tax loss harvest that particular lot.
Well with Wealthfront’s tax loss harvesting product, what they’ll actually do is they’ll go and see when any single individual stock drops in the red, they’re going to tax loss harvest just that stock.
So they can essentially, algorithmically tax loss harvest on a stock by stock basis, not on an ETF as a whole basis.
That is one of the main key benefits they will promote as part of their platform.
So they handle the schlep of tracking and rebalancing each individual stock essentially serving as the ETF’s packager, the same way Vanguard’s ETFs are packaged by Vanguard.
So those are the main advantages you get by working with a robo advisor.
But there are some very significant downsides too, and they all originate from the fees, the costs, these robo advisors charge…and when you think about it, the lack of value add versus just implementing the investment strategies yourself using a plain vanilla Vanguard account.
So let’s talk about what some of these fees and costs are with robo advisors.
Just like human financial advisors who actually manage your money, robo advisors take a percentage of your a AuM, your assets under management, each and every year as a fee for the services they provide.
And they typically collect this fee monthly, both Wealthfront and Betterment charge similar but slightly different fees.
Basically, you can think of it as 0.25% of AuM. A quarter point of your assets under management.
That’s in contrast to a human financial advisor, which roughly will take 1% of your assets under management.
So at least relative to human financial advisors, the robo advisors are charging you only a quarter of the amount, so that seems good, right?
Betterment offers in addition to their 0.25% service, they also offer a little bit of elevated service where you get a little bit of human support, and for that, they’re going to charge you 0.4% of AUM, so a little bit more, but still within the ballpark.
There are some nuances and details at the margin of how the pricing works, but roughly you can just think about it as 0.25% of your AUM.
But that means that every $100,000 you deposit in one of these robo advisors, you’re going to be paying $250 annually and fees. You deposit a million, now you’re paying $2,500 annually in fees.
And this not only drags your return down year after year, but you’re also paying increasing dollars with each passing year as your portfolio grows because the pricing is proportional to your AUM.
So even though the service you get stays exactly the same each year, the number of dollars you’re paying will increase as your portfolio increases.
And while that would be true for any asset manager, even if you’re investing by yourself with Vanguard, because even Vanguard charges an expense ratio for their ETFs…because the percentage costs are so different between a robo advisor vs. Vanguard, and indeed is so much more expensive with a robo advisor, it really adds up in a profound way.
Because any advisor, whether robo or human, any advisor that charges you a hefty proportional fee like that means you as the investor are going to have to work harder and harder into your elder years, paying more and more of your paycheck to your advisor, whether human or robo, who was doing the exact same amount of work as they did at the very beginning of your relationship.
But with robo advisors, because the percentage is so much higher than your typical Vanguard passive ETF, in fact, as much as 10x higher, the number of dollars really adds up in a much more consequential way.
And so how robo advisor fees compound over time versus how Vanguard fees compound over time, say over a 30 or 40 year horizon, which is the duration of your typical career is going to come out to be in the ballpark of half a million dollars or more in extra fees that you pay by investing with a robo advisor versus just holding your money in rock bottom low cost Vanguard funds.
Think about that for a moment. Half a million dollars or more in extra fees you pay for using a robo advisor.
By contrast, investing in a plain vanilla Vanguard index fund is going to cost you way less. If you invest in Vanguard’s total stock market fund, ticker symbol VTI, your expense ratio is going to be 0.03%.
That means, investing $1 million in that asset is going to cost you $300 for the whole year in expenses.
If you invest in their total bond market fund BND, the expense ratios 0.035%. So a million dollars invested in that is going to cost you 350 bucks for the whole year.
You invest in Vanguard long term Treasury market ETFs VGLTD, expense ratio is 0.07%. So a million bucks in that is gonna cost you $700 for the whole year.
In other words, you can see here that Vanguard funds are way cheaper compared to the 0.25% fee charged by robo advisors.
It is up to 9x cheaper than a robo advisor fee.
And when it comes to index investing, costs really matter a lot in the ultimate outcome that you’re able to get after a long period of time compounding.
But there’s more, because all of the benefits we talked about earlier with robo advisors that they can do things like automatic rebalancing for you and they can do tax loss harvesting using direct indexing, those benefits are not uniformly relevant to all investors.
For example, lots of people carry the majority of their retirement wealth in tax advantaged retirement accounts like 401ks and IRAs and Roth accounts.
For these type of accounts, there’s no such thing as capital gains or annual taxes, so the concept of tax loss harvesting is irrelevant for money in these accounts because they don’t have any notion of capital gain.
Tax loss harvesting only applies for money that is held in a taxable brokerage account.
And it does have real value and it’s worth tracking and monitoring to take advantage of tax loss harvesting opportunities, but it only applies to the slice of money you actually store in a taxable brokerage account.
And since many people don’t hold a lot of money in taxable brokerage accounts, that benefit that robo advisors offer may have no impact on such investors.
Related: Be sure to also check out our related post on tax loss harvesting and tax gain harvesting.
And even for investors who have a sizable balance in their taxable accounts, there are other reasons why robo advisors may not be ideal.
For one thing with Wealthfront’s direct indexing tax loss harvesting product, I mean good luck leaving Wealthfront if you actually take part in that product. Because what they’re going to do if you try to ever take your money out of Wealthfront is that they’re just going to dump 500 individual stock holdings on you.
And you know, you’re not going to go manage that by hand. You could sell them and liquidate for cash. But now you’re going to realize capital gains and pay taxes on that, when what you really want, if you’re holding this money in an independently managed portfolio, is you just want to buy one ETF, you just want to buy VTI. That’s it.
You don’t want to buy 500 individual stocks and have to finagle with that much stuff.
And on top of that, anyway, for a long term buy and hold investor who is passively investing in a market tracking index, which is the approach I believe anyone who is not a full time money manager should take, and which Warren Buffett agrees with too — he famously wrote in one of his annual letters that if he were to get hit by a bus, to make sure his wife was financially looked after, he would simply put his inheritance money for her in a plain vanilla passive Vanguard account.
Anyway, if you’re one of these long term buy and hold investors, who is passively investing in a market tracking index, as you should be, then you’re not realizing any capital gains on a regular basis anyway that you can use tax loss harvesting to offset.
And you don’t want to be trading too often anyway, because the transaction fees and taxes are going to decimate you. Plus, you won’t get preferential capital gains tax treatment, when you’re not buying and holding for a year or more.
If you are turning over you’re holdings so frequently, you’re going to be paying short term capital gains tax rates, which are much higher.
The benefit of tax loss harvesting that the robo advisors offer are really suited to exactly the type of behavior that a long term buy and hold investor shouldn’t be doing anyway and wouldn’t be doing anyway.
Now some people are going to point out that you can use tax loss harvesting to offset some of your ordinary income, because you get a little bit of an allowance each year to offset ordinary income if you have more losses than gains.
But the thing is, you’re capped at $3,000 offset per year, which based on your tax rate might be a little bit more than than $1000 bucks a year of taxes savings.
Everybody’s different, but that’s just not enough motivation to me to use a robo advisor when you can just as easily capture most of that tax loss harvesting benefit against your ordinary income by simply manually selling share lots from your Vanguard account.
That extra little bit of optimization that Wealthfront can provide through their tax loss harvesting product just isn’t worth the activation energy to switch over, on top of the high fees they already charge.
Anyway, even if you do want the benefit of automatic rebalancing, so that you don’t have to do it, there are investment options from traditional brokerages like Vanguard that already do that exact thing.
They’re called target date funds. And that’s where the asset allocation of the funds that you buy shifts over time to become more conservative as you get older.
It starts very stock heavy, very aggressive when you’re young. And gradually it reallocates toward more bond heavy and less volatile investments as you get older.
By the time you retire, they’re heavily weighted towards safe bonds, treasuries, similar investments like that, so that you have low volatility and good income return from that fund during retirement.
So at the end of the day, when you ask yourself, should you really use a robo advisor, if it’s not already plainly clear, I don’t believe in using robo advisors like Wealthfront or Betterment, because you can independently achieve the same results without paying the same quarter point management fee, by simply investing in buy and hold Vanguard ETFs that charge you six to nine times less in fees than robo advisors will.
It’s just too expensive for an outcome you can pretty much manage yourself in Vanguard with minimal skill and effort.
And by the way, when I say “managing your own investments,” I don’t mean becoming a day trader.
That would be futile, because unless you’re closely analyzing the financial statements and economic and operational fundamentals of the business, which you wouldn’t be able to do for more than 5-10 companies, if you are working full time as a financial analyst, which you probably aren’t, because you probably have a day job that’s not analyzing investments on Wall Street, then anything short of that type of investing is really just gambling because you couldn’t possibly know enough about what you are buying to make a truly informed analytical decision.
You would essentially have to be a full time hedge fund analyst actually spending all your waking hours looking at these handful of companies to actually have an informed perspective on what the right price and right timing is to buy such a stock.
So unless you’re doing that you’re not arguably investing, you’re gambling at best and speculating at worst. And what you want to do is you want to be investing.
By the way, I keep mentioning Vanguard over other brokerages like Fidelity or Schwab because, unlike all other brokerages which are for profit corporations, Vanguard is essentially a nonprofit organization owned and operated by the investors who actually put their money in Vanguard, people like you and me.
And one of the benefits of that is their fees are the lowest in the industry, which was a founding principle of John Bogle, the founder of Vanguard. John Bogle started Vanguard, specifically, with the purpose of having the lowest fees in the industry.
And even today, it basically just runs at cost. So whatever fund you buy from Vanguard, you can pretty much rest assured it’s the lowest cost fund of its kind in the industry.
Vanguard doesn’t do a lot of actively managed funds. Their whole premise is to offer cheap, passively managed funds that match the return of whatever overall index it’s tracking, for as low cost as possible.
By the way, I have no affiliation with Vanguard. They’re not paying me to say any of this and I’m not benefiting in any way from doing so.
So hopefully this episode has given you something to think about when it comes to evaluating human versus robo financial advisors.
My key recommendation is to skip the robo advisor and skip the human financial advisor. Focus on buying passive index funds from Vanguard to just match the market return for as low cost as possible.
When you’re investing in index funds like that, you don’t control the earnings side of the equation, because you’re pretty much just a price taker by tracking the index, you’re just going to get an index matching return.
But you do control the cost side of the equation by being as expense efficient and tax efficient as possible.
And that is what Vanguard provides. Robo advisors are going to be six to nine times more expensive on the cost side, but definitely not six to nine times better in terms of increased returns from the efficiency side, and that’s because you can do the same thing they do with not a lot of skill just by using Vanguard funds, especially target date funds, which are going to be way cheaper than robo advisors and certainly human advisors for sure.
As for tax loss harvesting, you need to actually have capital gains to take advantage of tax loss harvesting.
But if you’re doing what you’re supposed to be doing, which is plain Jane buy and hold investing, then you’re not regularly and consistently selling and realizing capital gains in a taxable account anyway, so you won’t have so many capital gains to offset using tax loss harvesting.
Anyway, I would urge you to keep in mind what John Bogle, again, founder of Vanguard, said about how people ideally should be managing their portfolio.
And he said: “don’t just do something, stand there!”
Playing on the cliche of saying, “Don’t just stand there, do something.”
But when it comes to investing, the better course is, “don’t just do something, stand there.”
Don’t do anything to to your portfolio, just let it grow on its own.
Finally, if you’re like many people who have much of their wealth tied up in tax advantaged retirement accounts, then you won’t even be able to benefit from things like tax loss harvesting anyway which only applied to brokerage accounts.
The bottom line I want to leave you with is that it’s not a good idea to try to take a shortcut thinking that a robo advisor will just be a flip of the switch and then you can just go on autopilot.
You will pay for that dearly in fees. instead focus on how to make your investments compound as much as possible.
And when it comes to passive index investing, that’s going to be just as much or even more about saving on fees, as it is about finding the best risk adjusted return.
And Vanguard is going to be superior at fees over going with any robo advisor.
On top of that, you can do enough of the tax loss harvesting directly within Vanguard. They give you all the tools you need to execute tax loss harvesting well, and I’ll even link you to a step by step blog post guide I wrote on this exact topic showing you exactly how to tax loss harvest with Vanguard.
I’ll leave that link in the show notes for this episode.
Okay, if you liked this episode, please hit that subscribe button to get new episodes automatically sent to you.
And please take 30 seconds to help me out, go to iTunes and leave a podcast review for me. It does help to support the podcast and it helps other people who are interested in these topics, find the podcast. So I really appreciate it if you could take a minute and leave an honest review.
As always, I’m going to leave a link to that in the show notes so that you can write a review really quickly on your device or in your iTunes or Google Play or Spotify browser each week.
As you know, I call out one subscriber review on the show and thank them personally for posting that review. So please take a minute to review the podcast I would love to thank you personally on the air on the show to my audience.
All right, thanks for tuning in next time I’m going to do something different. Instead of doing the strategy tactics episode, I’m going to talk about some personal reflections on FIRE – financial independence, retire early – and how I recommend developing the right mindset that will help you take concrete actions to achieve FIRE on your own terms and the way that’s best for you.
I think you’ll get lot of insight out of that episode, so be sure to tune in next time and check that out. See you soon.
Related: Be sure to also check out our related post on tax loss harvesting and tax gain harvesting.