I use Wealthfront, and I think maybe you should too.
Wealthfront has a number of features that the average investor can likely use right away. Automated investment management (also called a robo-advisor) can help you start saving with a hands-off approach. The retirement planning tools can give you a picture of your financial health to go along with your long-term goals. Add to those features the variety of investment strategies, account types, and ease of use, and you get a powerful tool for online investing.
Now as a disclosure, I’m not a tax expert or a financial planner. Just a layman who uses Wealthfront who wants to share my experience.
Ok into the good stuff.
Automated Investment Manager (Robo Advisor)
The core reason you’re gonna use Wealthfront is the automated investing management feature. It’s easy to use and helpful in setting you up to achieve your specific goals.
When opening an investment account, Wealthfront gives you a quiz to assess your risk tolerance with your score guiding how Wealthfront will invest your money. A risk score of 1 would put you in a fund with mostly government and municipal bonds, some corporate bonds, and a more general US Index Fund – a very conservative portfolio likely not to make you much upside, but also extremely unlikely to lose your money. On the opposite end of the spectrum a risk score of 10 would put you heavily into US Stocks, as well as developed economy ETFs, and emerging market ETFs, and almost nothing in bonds – this is a much more aggressive portfolio potentially exposing you to high growth but also potentially having lots of fluctuation or even losing money.
Now the magic or… really the robotics of Wealthfront come when it’s automatically rebalancing your portfolio.
Now I’m going to try to keep this as simple as we can without going into Modern Portfolio Theory or Post-Modern Portfolio Theory. If you wanna get more in-depth on it, let’s chat.
The idea of the risk portfolios there is you have your money put into different asset classes. E.g.
- Domestic Stocks
- Foreign ETFs
- Bonds
- Dividend ETFs
- Real Estate Investment Trusts (REITs)
Your Risk Score is gonna help Wealthfront figure out where you should be allocating your money into different asset classes, given that historically, each asset class has a likely return and risk. For example, bonds are very likely low returns with low risk. Foreign ETFs, especially for emerging markets are potentially high returns with high risk. A dividend ETF might be more in the middle.
Now, after Wealthfront designs a portfolio based on your risk score, it’s gonna allocate the money you put into it based on its percentages it believes you should have in each class.
- Domestic Stocks – 40%
- Foreign ETFs – 20%
- Bonds – 10%
- Dividend ETFs – 20%
- Real Estate Investment Trusts (REITs) – 10%
So if you put in $10,000, Wealthfront is gonna divy up your money like so:
- Domestic Stocks – 40% – $4,000
- Foreign ETFs – 20% – $2,000
- Bonds – 10% – $1,000
- Dividend ETFs – 20% – $2,000
- Real Estate Investment Trusts (REITs) – 10% – $1,000
Toal Portfolio $10,000
Now that’s great! You’ve got your money now divided into a series of asset classes, each with its own relative risk and upside. What could go wrong? Well, the market fluctuates. And when this happens, and you’re an inactive investor, you may end up with a portfolio that’s too heavy in an asset class that doesn’t have the right risk or return profile that’s right for you. But Wealthfront‘s robo-advisor fixes that for you in the background, you don’t have to lift a finger.
So let’s imagine that the Foreign Market ETF you’re in triples overnight. Wow! Your $2,000 is now worth $6,000. AWESOME. But wait, now the largest chunk of your money is a kind of risky asset class. Wealthfront‘s Robo-Advisor is going to sell some of the Foreign Market ETF to get you back to the original balanced portfolio it prescribed you. You don’t need to do any math, any selling, any buying, Wealthfront does it all and this is how your money is spread out now:
- Domestic Stocks – 40% – $5,600
- Foreign ETFs – 20% – $2,800
- Bonds – 10% – $1,400
- Dividend ETFs – 20% – $2,800
- Real Estate Investment Trusts (REITs) – 10% – $1,400
Toal Portfolio $14,000
So what’s great is you’ve distributed some of that upside into all of your different asset classes making sure the growth you are seeing is growing like your risk profile says it should.
But, it should be warned, asset classes can also lose money. Let’s imagine the allocation we have above, and now the Foreign markets tank and that foreign Market ETF loses 80% of its value overnight. Yikes. Again, have no fear Wealthfront has got you. Now instead of doing what a scared irrational investor may do, and sell the rest of the Foreign ETF to make sure they don’t lose money, Wealthfront‘s gonna do the opposite and sell some of your other asset classes to buy the Foreign ETF. Now you may think, why would it buy a losing stick. Well, another perspective on this is, the Foreign ETF is on sale. And if Wealthfront helps you reallocate your investments to the one that’s on sale, you can potentially get more gains on that asset class. So last time, now your portfolio looks like this
- Domestic Stocks – 40% – $4,704
- Foreign ETFs – 20% – $2,325
- Bonds – 10% – $1,176
- Dividend ETFs – 20% – $2,2352
- Real Estate Investment Trusts (REITs) – 10% – $1,176
Toal Portfolio $11,760
Now you look at that final portfolio and think, wait one hot minute. I had $14,000. Wealthfront moving my money around screwed me. No, because if you’d done nothing and just kept your money in the Foreign Market ETF the whole time without reallocating your investments, your portfolio would look like this.
- Domestic Stocks – 43% – $4,000
- Foreign ETFs – 13% – $1,200
- Bonds – 11% – $1,000
- Dividend ETFs – 22% – $2,000
- Real Estate Investment Trusts (REITs) – 11% – $1,000
Toal Portfolio $9,200
So Wealthfront, by balancing your portfolio into those target allocations, helped avoid losing $800 and instead, gained $1,760 (in this admittedly exaggerated and unlikely scenario). But the trick is, Wealthfront is working for you every day. Constantly balancing. Constantly making sure you’re on the right track for portfolio growth.
Now some alternatives offer a Robo-Advisor, like SoFi or Betterment, but having used both, I tend to like Wealthfront the most.
Types of Portfolios
Now as I mentioned the risk score, than can help you deterimine which type of portfolio you should be getting into. Those close to retirement much less risky, those with a longer investing horizon can afford to be more risky, and therefore potentially get a higher gain. Wealthfront guides you through that.
What’s also nice is you can multiple accounts with no additional fees.
I personally have two individual brokerage accounts. One I call my long term investing account. It’s a relatively high risk account, designed for me to hold until I retire. I contribute money to it regularly and Wealthfront keeps working to look out to old me. He’s gonna appreciate that.
I also have an emergency fund account. This one’s much more conservative in it’s investment approach to investing. It hold some more medium term savings that I could imagine needing to tap into one day, but I don’t think I’ll need it to be totally liquid at a moment’s notice. The idea here is that if I can get a more conservative return, larger than you’d get on a High Yield Savings Account, with minimal volatility, it’s a good place to store excess “cash.”
If you have a few different account types, with different goals you can can customize the investing profile to exactly what you need.
Account Types
Lots of account types make it so you can open account type for almost any type of need. Account types include:
- Individual Brokerage
- Joint Brokerage
- Roth IRA
- Traditional IRA
- Rollover IRA
- SEP IRA
- 529 College Savings Plan
Also there also cash accounts like
- High Yield Cash Account
- Joint Banking Account
- Trust Account
