How to Invest Well

Invest Well

Get $15,000 Managed For Free – ht tp: / /wl th. f r / jeff r

Jeff Rosenberger, PhD @ R o s e n b e r g e r J e f f

w e a l t h f r o n t . c o m

http://wlth.fr/jeffr

©2014 Wealthfront Inc.2

Wealthfront Investment Talks

THESE DO NOT REPRESENT COMPANY ENDORSEMENTS

©2014 Wealthfront Inc.SOURCE Source Title 3

Put First Things First SET YOUR PRIORITIES

• Diversify your company stock!

• Taxes, taxes, taxes!

• Establish an emergency fund!

• Pay down expensive debt!

• Buy a house!

• Invest to achieve your goals!

• Philanthropy & play money

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©2014 Wealthfront Inc.

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Every Portfolio Has AnExpected Return BUT ALSO RISK!

Mix of Stocks & Bonds

Company!Stock


Putting ThePieces Together INVESTING WELL

HOW DO YOU

• Construct the Efficient Frontier!

• Assess your risk profile!

• Manage your portfolio over time!

• Be thoughtful about taxes


Asset Allocation IsThe Starting Point SOURCES OF RETURN

SOURCES Brinson et al (1986 & 1991), Ibbotson & Kaplan (2000)

Impact on AveragePortfolio Performance

Market Timing 2%

Security Selection 7%

Asset Allocation 91%


Which Are The BestTo Include? CHOOSING ASSET CLASSES

ExpertsRecommend

US Stocks

Foreign Stocks

Emerging MarketsReal Estate

Natural Resources

Bonds

SOURCES Swensen (2005), Malkiel (2012) & Wealthfront


The Value Of GreaterDiversification CHOOSING ASSET CLASSES

US Stocks Foreign Stocks Emerging Markets Real Estate Bonds Natural Resources

Wealthfront used the following for its calculations: US Bonds (Barclays Capital US Aggregate Bond Index), Foreign Stocks (MSCI EAFE Total Return Index), Emerging Markets (MSCI Emerging Markets Total Return Index), Real Estate (NAREIT North America Index), Natural Resources (DJ-UBS Commodity Index Total Return Index). Wealthfront presents the information going back to 1987, which is the earliest date that necessary data is available for all six of the asset classes being used.


Value Of Diversifying Assets CHOOSING ASSET CLASSES

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Efficient Frontiers

SOURCES Wealthfront estimates


Mutual FundsUnderperform Index Funds REPRESENTING THE ASSET CLASSES

SOURCES Amott et al., Journal of Portfolio Management 26, no. 4 (2000); Swensen (2005), Bogle (2009), Malkiel (2012)!

• Mutual funds underperform2/3 lag their benchmark per year

• Lack of persistenceOutperforming funds underperform in subsequent years

• Underperformance is meaningfulUp to 2% annually!


We RecommendExchange-Traded Funds REPRESENTING THE ASSET CLASSES

LOOK FOR INDEX ETFs WITH…

• Low Expensesminimal expense ratio

• Minimal Tracking Errorclosely matches the index

• Market Liquiditycan be traded efficiently


Vanguard Has ManyOf The Best ETFs OPTIMIZING THE MIX

Our ETFRecommendations

VTI!US Stocks

VEA!Foreign Stocks

VWO!Emerging Markets

VNQ!Real Estate

DJP!Natural Resources

MUB / BND!Bonds

Wealthfront regularly surveys the ETF landscape and ranks ETFs in each asset class using the criteria described in the prior slide. Vanguard ETFs often come out on top. Wealthfront receives no compensation for recommending Vanguard products or any other ETFs.

SOURCE Wealthfront.com


Allocations For EveryRisk Level ASSESSING YOUR RISK PROFILE


US Stocks Foreign Stocks Emerging Markets Dividend Stocks Natural Resources TIPS

Municipal Bonds

TAXABLE ALLOCATION WEIGHTS FOR EACH RISK TOLERANCE LEVEL


Two MeasuresOf Risk ASSESSING YOUR RISK PROFILE

SOURCES Vanguard.com and smartmoney.com

Objective Risk ToleranceSubjective Risk Tolerance

http://smartmoney.com

©2014 Wealthfront Inc.

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Rebalancing is Key MANAGING YOUR PORTFOLIO OVER TIME

Value of Investments Change Over Time


RebalancingConsiderations MANAGING YOUR PORTFOLIO OVER TIME

Keep In Mind

Changes In Your Risk Profile

Tax Implications Impact of Commissions


Allocate Differently For YourTaxable Assets… BE THOUGHTFUL ABOUT TAXES


US Stocks Foreign Stocks Emerging Markets Dividend Stocks Natural Resources TIPS

Municipal Bonds


…Versus Your IRA & 401k BE THOUGHTFUL ABOUT TAXES


US Stocks Foreign Stocks Emerging Markets Dividend Stocks Real Estate TIPS

Corporate Bonds Emerging Market Bonds


The results shown here are hypothetical from a volatile year (2011) and are not based on actual trading or client accounts. !Past performance is no guarantee of future results and any historical returns, expected returns, or projections may not reflect actual future performances. All securities involve risk and may result in some loss. We incorporated trading costs ($8/trade, bid-ask spreads, and incremental expense ratios for the alternate ETFs used in tax-loss harvesting.

$100,000 INVESTMENT MIX

HARVESTABLE TAX LOSSES

-5.0% -10.0% -15.0% -20.0% -25.0%0.0%

TAX-LOSS HARVESTING VALUE

1 2 3

SOURCE Google Finance | *Consult your tax advisor to determine whether tax-loss harvesting is right for you.

Improve Your After-Tax Returns TAX-LOSS HARVESTING*


Recap

*Consult your tax advisor to determine whether tax-loss harvesting is right for you.

The results shown are hypothetical and not based on actual trading or client accounts. Past performance is no guarantee of future results and any historical returns, expected returns, or projections may not reflect actual future performances. All securities involve risk and may result in some loss. See disclosures for more details.

Investing Well• Diversify broadly across and within

asset classes!!

• Use low cost ETFs or index funds!!• Determine your tolerance for risk

• Rebalance as needed over time!!

• Be thoughtful about taxes

INVESTING WELL BENEFIT

Low-Cost ETFs (vs. Mutual Funds) 2.1%

Optimized Tax-Aware Allocations 1.1%

Threshold Rebalancing (vs. No Rebalancing) 0.4%

Tax-Loss Harvesting* 1.0%

Total Annual Benefit 4.6%


More Reading

A Random Walk Down Wall StreetBurton Malkiel!!!!The Elements of InvestingBurton Malkiel & Charles Ellis!!!!Unconventional SuccessDavid Swensen!!!!What Investors Really WantMeir Statman!!!!Winning the Loser’s GameCharles Ellis!

Burton Malkiel is Wealthfront’s Chief Investment Officer and Charles Ellis & Meir Statman are Wealthfront advisors.


Disclosures

Nothing in this presentation should be construed as a solicitation or offer, or recommendation, to buy or sell any security. Financial advisory services are only provided to investors who become Wealthfront clients pursuant to a written agreement, which investors are urged to read and carefully consider in determining whether such agreement is suitable for their individual facts and circumstances. Past performance is no guarantee of future results, and any hypothetical returns, expected returns, or probability projections may not reflect actual future performance. Investors should review Wealthfront’s website for additional information about advisory services.

ASSET CLASS RETURNS

Wealthfront used the following for its calculations: US Bonds (Barclays Capital US Aggregate Bond Index), Foreign Stocks (MSCI EAFE Total Return Index), Emerging Markets (MSCI Emerging Markets Total Return Index), Real Estate (NAREIT North America Index), Natural Resources (DJ-UBS Commodity Index Total Return Index). Wealthfront presents the information going back to 1987, which is the earliest date that necessary data is available for all six of the asset classes being used.

TAX-LOSS HARVESTING

The tax-loss harvesting analysis on slide 19 presents hypothetical results for tax-loss harvesting in a volatile year like 2011. The example assumes $100,000 investment on January 1st, 2011 and the opportunity to harvest losses on December 15, 2011. Past performance is no guarantee of future results, and any hypothetical returns, expected returns, or probability projections may not reflect actual future performance. Consult your tax advisor to determine whether tax-loss harvesting is right for you.

Disclosures

ESTIMATED BENEFITS

The performance checklist on slide 20 compares the estimated time-weighted returns of a Wealthfront investment with the returns experienced by an average 20-year US Mutual Fund investor as described by DALBAR.

The amounts are obtained by adding the projected additional rates of return from various Wealthfront investment features (as described here) to the average US Mutual Fund investor return from DALBAR (3.17%/year) and compounding the result on an annual basis over 20 years. It is intended to highlight the possible differences in earnings if you use Wealthfront’s investment approach rather than the approach applied by the typical US Mutual Fund investor and where your earnings are reinvested over a 20-year period.

It is not intended to predict portfolio earnings or performance, nor is it a guarantee of future performance or earnings. Actual investors on Wealthfront may experience different results from the results shown. The performance checklist does not represent the results of actual trading using client assets. See Full Disclosure at wealthfront.com.

LOW-COST ETFS VS. MUTUAL FUNDS

Arnott, Robert D., Andrew Berkin, and Jia Ye. 2000. “How Well Have Taxable Investors Been Served in the 1980s and 1990s?”

OPTIMIZED TAX-AWARE ALLOCATION

Wealthfront performed simulations that measured the difference in average annual return attributable to owning a taxable portfolio consisting of seven asset classes to a portfolio consisting of three asset classes assuming the same risk tolerance for the two portfolios for the period 1987-2010.

The three-asset-class portfolio consisted of US Stocks, US Bonds and International Stocks. Wealthfront’s seven-asset-class portfolio included US Stocks, Foreign Developed Stocks, Emerging Market Stocks, Dividend Growth Stocks, Municipal Bonds, TIPS and Natural Resources. Annual rebalancing was assumed. While the data used for this comparison and the optimal allocation comparison are from sources that Wealthfront believes are reliable, these comparisons represent Wealthfront’s opinion only.

AUTOMATIC REBALANCING

Swensen, David, Unconventional Success, 2005, pp. 195-96.

TAX-LOSS HARVESTING

We simulated the potential after-tax benefit of our tax-loss harvesting and found that it added an average of at least 1.13% annually, net of commissions. The results are hypothetical only and should not be relied upon for predicting future performance. See our tax-loss harvesting white paper for more details. Wealthfront’s tax-loss harvesting strategy is available only to portfolios with $100,000 in a taxable account.

http://wealthfront.com

Questions

Get $15,000 Managed For Free – ht tp: / /wl th. f r / jeff r

Jeff Rosenberger, PhD @ R o s e n b e r g e r J e f f

w e a l t h f r o n t . c o m

http://wlth.fr/jeffr

How to Invest Well

Economy & Finance

Transcript of How to Invest Well