I wrote this post in August 2014 comparing Betterment to Wealthfront, so it's been about 15 months, and I thought it'd be a good time to check in on relative performance, as a buddy of mine recently wrote:
"I saw your post on betterment. I'm thinking of moving everything over to a roboinvestor. What's your thinking on betterment vs wealthfront, and whether you'd just dump everything on there?"
As I wrote in my original post, I put $5k into both Betterment and Wealthfrontto test them against each other. To date, both have under-performed the S&P 500 by a considerable margin. S&P is up 10% since August 2014. Betterment is down by 2% and Wealthfront is down by 5.4%. So, should I just have invested in the S&P 500? And as per my other previous blog, Show Me The Money: Six Strategies to Put Your Cash to Work, how should I re-allocate based on this new data? And what would I recommend to my buddy? Let's dig into the data a bit to come to a conclusion:
Here's a chart in my Betterment dashboard that compares the performance of my Betterment investment (in orange) to the S&P 500 over the same period (in blue). I also threw in a Vanguard bond fund's performance just for a benchmark on how a more conservative investment has done:
Sadly, Wealthfront's dashboard isn't nearly as sophisticated. Here's all they show me:
Interestingly, here's how the Wealthfront has actually performed vs. how they predicted it would:
Meanwhile, in my "six strategies" blog post I referenced investing in peer to peer micro-lending via LendingClub, and then I wrote this update on using the LendingRobot API to be more sophisticated about how I do the P2P lending. Here's the LendingRobot dashboard of my P2P returns to date:
So LendingRobot is predicting that the money I invested in LendingClub using its "automated investing" service (before I knew that LendingRobot existed) will return 8.92%, but the money I'm investing in LendingClub using the more sophisticated rules I've created with LendingRobot will return 13.20%, for a blended return of 9.79%. Needless to say, I've stopped using LendingClub's automated investing service and am using LendingRobot exclusively for all investments in LendingClub moving forward. But let's just assume I can make an average of a 10% return in LendingClub. Does that mean I should move all the ETF investments over to LendingClub?
Well, not necessarily: There are several drawbacks to P2P investing, namely:
- Income that comes from P2P lending is taxed at ordinary income rates, whereas equities that are held for a year or more are taxed at long-term capital gains rates.
- Dollars put into P2P are very illiquid because they're deployed into 36 to 60 notes, whereas the Betterment ETF funds are immediately available if needed.
- The interest rate of those 36 to 60 months notes are fixed, so if inflation were to kick into gear in a big way, those returns would be fixed while costs rise. Arguably equities could perform better in a higher inflationary environment, or at least the money is more liquid so I could move it to other places.
And to add to the complexity, I recently found a Vanguard high yield ETF that's returning a 3.11% yield, which provides for a blended approach: the liquidity and tax benefits of long-term-hold equities with some of the income elements of P2P lending.
So at the end of the day, here's my answer to my buddy who asked: Your decision really has to be based on your goals. Are you looking for an income producing asset? Are you willing to deploy cash in a risky way? In that case I'd focus on putting cash into LendingClub, via LendingRobot. But conversely, are you looking to stash cash somewhere that it can grow with the markets, where you don't need any immediate income from it? In that case I'd go with equities because historically they return in the 7% range annually, they're more liquid and get better tax treatment. And even though the Betterment and Wealthfront investments have greatly under-performed the S&P 500 over the past 15 months, I'm still sticking with them for now (and for the bulk of my cash, with Betterment specifically, which I greatly prefer over Wealthfront from a user experience perspective). Logically, I buy into their approach -- I like the Tax Loss Harvesting, I like the diversification into large, mid and small cap stocks and emerging markets. But I'm definitely going to keep tabs on how things go over the next couple of years, and I'll keep writing these updates (I'm in this for the long haul -- here's to decades of updates!). If I don't see Betterment start to out-perform other alternatives over a multi-year period, I'll likely change my approach.
I'd love to hear feedback from anyone who loves to geek out on this as much as I do! And for those of you who don't invest at all: Start with something small. $50. $100. Just get into it. Try a few things. There's a world of difference between $0 and $100, even just in the way you feel like you're investing in yourself and your family's future.
Where did you set your risk tolerance on both of the robos? Also how much has tax loss harvesting boosted your take home income?
Great post man. Btw I worked with Sam at TellApart. Looks like the apple doesn't fall far from the tree :)
Nice to meet you, Craig. That’s awesome about TellApart!
I set my risk tolerance to 10 on both services. Basically as risky as possible. All stocks and no bonds. Interestingly, even at "10" Wealthfront is keeping 1.7% in cash. Betterment doesn't do that (and I prefer not to have any amount kept in cash; I can do that on my own).
RE: TLH -- Betterment doesn't break out TLH for that specific "goal" (the Betterment vs. Wealthfront amount) but instead, gives a TLH number for my overall account. Looks to be about 12% of the total account, which would pencil out to $738 in tax losses harvested for this experiment.
Wealthfront doesn't have the concept of distinct "goals" (which interestingly has kept me from putting more $$$ into Wealthfront -- talk about an important feature!) so in the Wealthfront account I can see the full amount of TLH, which is $1,048:
So arguably, Wealthfront has done more TLH than Betterment, but since my Betterment TLH is just an estimate I wouldn't put much stock into that.
And Betterment has performed a bit better overall (though not that much; may not be enough to really say).
I have always preferred the Betterment UI/UX, though, and I continue to prefer it 3 years later.
Great post Dan! Any chance you can provide an update on the relative performance of Betterment vs Wealthfront vs S&P500 now that we're in 2017? Thanks!
Yep:
Wealthfront is at $6,010 and Betterment is at $6,153. The conclusion I’ve come to is as much as they try to differentiate themselves, they are both pretty much the same. Have not checked to see how that compares to the S&P 500.
Thanks that's helpful as I've been thinking about trying Wealthfront/Betterment vs holding Vanguard index funds directly. Not sure when you started exactly but assuming 4 years from today, W/B both come out to ~5% annual return. This compares with 9.5% for Vanguard VTI and 9.9% for Vanguard VOO (assuming 10/21/13 start date). I understand W/B's value proposition goes beyond index fund investing and their aim is to minimize volatility, but this is serious underperformance if ROI is the goal. Will be interesting to see more actual returns data but there curiously doesn't seem to be much data available despite W/B having been around since 2008. Will be particularly interesting to see relative performance during a bear market but we'll have to wait and see for that...
Randy, I pulled some more specific data for you from my accounts, below. If I compare the below to, say “VO” which is a mid-cap Vanguard ETF that tracks the S&P 500 pretty closely, that looks to be up from $118 on 7/22/14 to $150 today, a gain of 27%, whereas Wealthfront’s up 20.2% and Betterment’s up 22.7%.
So they definitely don’t perform as well in a bull market, but they’re arguably more diversified.
Wealthfront:
Up a total of 20.2% from July 22, 2014.
Betterment:
Up 22.7% in same time period
Thanks again. VOO covers S&P500 and VTI covers a even broader base of US stocks. My sense is that robo-advisors tend to OVER-diversify in hopes of smoothing out volatility. I, for the most part, am an active stock-picker (long-time fan of Buffett/Munger who btw don't prescribe to modern portfolio theory), but for passive investors Buffett's recommendation is to simply to put majority of wealth into a Vanguard S&P500 index fund and then forget about it. Don't really need to pay an advisor to do that but I guess it's often the simplest advice that's the hardest to follow? Furthermore, advisors perhaps have an incentive to make investing seem more complicated that it needs to be to justify management fees?
Just for clarification - VO is a mid-cap fund, VOO tracks the S&P 500. Total return for VOO from 7/24/14 through 10/20/17 is 37.8%. Substantial difference between the two indices.
Right, I was referring to VO, which is here, and when I said it tracks closely to S&P 500 I was referring to this:
A couple of points to make on the experiment.
First, depending on the risk profile initially selected, the appropriate benchmark to compare against would be a combination of U.S. stocks and bonds with similar volatility as the selected profile. I expect you'll find even "risk adjusting" the returns of the robos will show under-performance versus a comparable benchmark. Why? Read on.
Second, these robo-advisors are extremely overweight international and emerging markets on the premise that this provides diversification - based on their "backtests" using 30+ years of historical data. Those sectors have under-performed the U.S. markets (as I suggested they would when this experiment began). Why?
Leads to the third point - the "backtests" used to construct the weights of both vendor's models used data during an inflationary regime. Higher risk things like emerging markets worked well because global growth required lots of commodities, of which these countries are prime providers. That boosted their currencies (relative to the dollar) and provided great risk-adjusted returns to investors.
Since the 2009 correction the world has been in a dis-inflationary (or even deflationary) environment as evidenced by the performance of commodities since then. It's been masked by continuous money printing by central bankers, but we are still fighting deflation; not inflation.
As such the models just haven't performed as a naive approach such as Betterment's / Wealthfront's suggested.
Fourth point: the idea of diversification by holding emerging markets, international, commodities, reits, etc. is another flawed assumption that has proven worthless during the last 3 big market downturns. The next will be no different. Why?
In downturns all the asset class correlations approach "1" and the higher risk markets see withdrawals of liquidity back to the U.S. This means that at the time you need diversification; it's not available. Why does this occur? Because all global business cycles are now more interdependent (in sync) and all central bankers are moving in the same direction. I suggest it will just as bad, if not worse, in the next downturn. So, if you're banking on lower volatility and less loss in a sell-off, I suspect you'll be disappointed.
On the comment that there "curiously doesn't seem to be much data available despite W/B having been around since 2008". Do you really think that's just an oversight? After all, I'm sure they know their performance internally...they could easily post it on their website. Or do you think that perhaps that's a means of keeping clients in the dark?
Please don't get me wrong - I think W/B are decent first-order digital advisor solutions, but their a bit naive in the "research" that backs them. Instead they'd rather fire around meaningless buzzwords such as "Modern Portfolio Theory", "Nobel-prize winning", "can't beat the market", "extreme diversification" than showcase their numbers. Furthermore, their mission is the same as that of traditional advisors/brokers and that is to "capture" assets on which to continuously bill; albeit at a lower cost.
Just for full disclosure - I'm taking an orthogonal approach to the problem - recommendations, not managed accounts (at least to start), wherever your assets are held ( ie. 401(k) accounts, various brokers,etc.), active instead of passive, disclosure of the full performance history of all recommendations compared against similar risk target date funds. My guess is that our performance far out-paces that of W/B, though I haven't tracked it. If you have an interest, give me a starting date and I'll run the numbers for our Fidelity, Schwab, Vanguard, etc. models.
Best wishes for continued success however you roll!
Read Next
One Year In: Lending Money to Complete Strangers via an API... And Why You Should Try It
On DROdioAbout a year ago, I wrote a blog called "Show Me the Money: Six Strategies to Put Your Cash to Work," where I talked about two new(ish) investment strategies my wife and I were using. I wrote a followup blog about the first strategy, Electronically Traded Funds (ETFs), where I compared Betterment vs. Wealthfront. Now here is a followup on the second newish strategy that you're probably not yet trying out, but absolutely should be: Peer to Peer lending... or put another way: Lending money to complete strangers as an investment strategy.
I'm going to write this blog as a step-by-step how-to guide on trying P2P lending. Don't think you have enough money to become an investor? Wrong. Just set aside $25 to invest in each of the 2 biggest platforms. Seriously, who can't part with $50 to try something that will change your perspective on lending?
First, more on what P2P lending is:
Alternative Investments: Peer-to-Peer Lending
On Minimalist WealthKey Points:
+P2P Lending has a history of high returns and low volatility, particularly for larger investors.
+The time and skill requirement is low, making it great for passive investors.
-It is tax-inefficient, particularly for investors of high risk loans
A unique way of investing that has been around for less than a decade is Peer-to-Peer Lending. In P2P lending, loan-seekers seek loans directly from individuals rather than banks (who loan money using deposits from individuals). This is how the process works: