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How to Invest Well
 

How to Invest Well

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What are the key elements of a diversified portfolio? How can you assess your risk profile and build an investment mix around it? How will you account for taxable versus non-taxable investments, and ...

What are the key elements of a diversified portfolio? How can you assess your risk profile and build an investment mix around it? How will you account for taxable versus non-taxable investments, and how can you minimize the taxes you'll have to pay on your investing? All of that, and more, in Wealthfront's "Invest Well" slide deck.

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    How to Invest Well How to Invest Well Presentation Transcript

    • Invest Well Get $15,000 Managed For Free – http://wlth.fr/jeffr Jeff Rosenberger, PhD @ R o s e n b e r g e r J e ff w e a l t h f r o n t . c o m
    • ©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 IMAGE
    • ©2014 Wealthfront Inc. ExpectedReturn Risk Cash 4 Every Portfolio Has An
 Expected Return BUT ALSO RISK! Mix of Stocks & Bonds Company! Stock
    • ©2014 Wealthfront Inc. 5 Putting The
 Pieces Together INVESTING WELL HOW DO YOU • Construct the Efficient Frontier! • Assess your risk profile! • Manage your portfolio over time! • Be thoughtful about taxes
    • ©2014 Wealthfront Inc. 6 Asset Allocation Is
 The Starting Point SOURCES OF RETURN SOURCES Brinson et al (1986 & 1991), Ibbotson & Kaplan (2000) Impact on Average Portfolio Performance Market Timing 2% Security Selection 7% Asset Allocation 91%
    • ©2014 Wealthfront Inc. 7 Which Are The Best
 To Include? CHOOSING ASSET CLASSES Experts Recommend US Stocks Foreign Stocks Emerging MarketsReal Estate Natural Resources Bonds SOURCES Swensen (2005), Malkiel (2012) & Wealthfront
    • ©2014 Wealthfront Inc. 8 The Value Of Greater
 Diversification 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.
    • ©2014 Wealthfront Inc. 9 Value Of Diversifying Assets CHOOSING ASSET CLASSES Efficient Frontiers SOURCES Wealthfront estimates
    • ©2014 Wealthfront Inc. 10 Mutual Funds
 Underperform 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 underperform
 2/3 lag their benchmark per year
 • Lack of persistence
 Outperforming funds underperform in subsequent years
 • Underperformance is meaningful
 Up to 2% annually!
    • ©2014 Wealthfront Inc. 11 We Recommend
 Exchange-Traded Funds REPRESENTING THE ASSET CLASSES LOOK FOR INDEX ETFs WITH… • Low Expenses
 minimal expense ratio
 • Minimal Tracking Error
 closely matches the index
 • Market Liquidity
 can be traded efficiently
    • ©2014 Wealthfront Inc. 12 Vanguard Has Many
 Of The Best ETFs OPTIMIZING THE MIX Our ETF Recommendations 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
    • ©2014 Wealthfront Inc. 13 Allocations For Every
 Risk Level ASSESSING YOUR RISK PROFILE SOURCE Wealthfront.com US Stocks Foreign Stocks Emerging Markets Dividend Stocks Natural Resources TIPS Municipal Bonds TAXABLE ALLOCATION WEIGHTS FOR EACH RISK TOLERANCE LEVEL
    • ©2014 Wealthfront Inc. 14 Two Measures
 Of Risk ASSESSING YOUR RISK PROFILE SOURCES Vanguard.com and smartmoney.com Objective Risk ToleranceSubjective Risk Tolerance
    • ©2014 Wealthfront Inc. ExpectedReturn Risk 15 Rebalancing is Key MANAGING YOUR PORTFOLIO OVER TIME Value of Investments Change Over Time
    • ©2014 Wealthfront Inc. 16 Rebalancing
 Considerations MANAGING YOUR PORTFOLIO OVER TIME Keep In Mind Changes In Your Risk Profile Tax Implications Impact of Commissions
    • ©2014 Wealthfront Inc. 17 Allocate Differently For Your
 Taxable Assets… BE THOUGHTFUL ABOUT TAXES SOURCE Wealthfront.com US Stocks Foreign Stocks Emerging Markets Dividend Stocks Natural Resources TIPS Municipal Bonds
    • ©2014 Wealthfront Inc. 18 …Versus Your IRA & 401k BE THOUGHTFUL ABOUT TAXES SOURCE Wealthfront.com US Stocks Foreign Stocks Emerging Markets Dividend Stocks Real Estate TIPS Corporate Bonds Emerging Market Bonds
    • ©2014 Wealthfront Inc. 19 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*
    • ©2014 Wealthfront Inc. 20 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%
    • ©2014 Wealthfront Inc. 21 More Reading A Random Walk Down Wall Street
 Burton Malkiel! ! ! ! The Elements of Investing
 Burton Malkiel & Charles Ellis! ! ! ! Unconventional Success
 David Swensen! ! ! ! What Investors Really Want
 Meir Statman! ! ! ! Winning the Loser’s Game
 Charles Ellis! 
 Burton Malkiel is Wealthfront’s Chief Investment Officer and Charles Ellis & Meir Statman are Wealthfront advisors.
    • ©2014 Wealthfront Inc. 22 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.
    • Questions Get $15,000 Managed For Free – http://wlth.fr/jeffr Jeff Rosenberger, PhD @ R o s e n b e r g e r J e ff w e a l t h f r o n t . c o m