Investing can feel complicated\u2014it\u2019s easy to go overboard reading market commentary, chasing stock tips, and listening to what your friends and family members are doing with their portfolios. But Wealthfront has always believed that the stress associated with investing is optional. We automate award-winning research (like Modern Portfolio Theory, which won a Nobel Prize in 1990) and time-tested strategies to make smart investing feel effortless. <\/p>\n\n\n\n
But what does that look like in practice? If we had to boil our philosophy down to one sentence, it would be this: We think investors should take a <\/strong>passive approach to long-term investing<\/strong><\/a> and focus on what they can control: fees, taxes, and risk.<\/strong><\/p>\n\n\n\n In this post, I\u2019ll break down exactly what that means.<\/p>\n\n\n\n When you hear people talking about picking stocks, shifting their portfolio allocation in response to market conditions, or day trading, they\u2019re generally describing what\u2019s known as active investing. Active investing is, as the name suggests, when you actively choose specific investments at specific times with the goal of outperforming the broader market. Active investing might sound fun (and we think it\u2019s fine to allocate up to 10% of your portfolio to stock picking), but its track record isn\u2019t all that great when you compare it to the alternative.<\/p>\n\n\n\n According to the 2024 year-end SPIVA report<\/a>, which evaluates the performance of actively managed funds, 78.65% of all domestic funds underperformed their benchmarks in 2024. That number rises to a staggering 94.11% when you look at the last 20 years. <\/strong>What does that mean for you? A large majority of professional active fund managers are underperforming their benchmarks, which means your odds are probably even worse. <\/strong><\/p>\n\n\n\n That\u2019s why we think you should take a passive approach instead. With passive investing, you don\u2019t spend time trying to beat the market. Instead, you buy investments (often index funds) with the goal of tracking the overall performance of the market.<\/p>\n\n\n\n Fees can eat away at your return. While a traditional advisor is likely to charge something like 1% of your portfolio value each year to manage it for you, Wealthfront charges 0.25% or less for our investing products (depending on which specific product you use). That difference might sound relatively small, but over time it can really add up. <\/p>\n\n\n\n Here\u2019s an example to help illustrate the effect that fees can have on a portfolio over time: If you made a one-time investment of $50,000, stayed invested for 10 years, and earned a 7% annual rate of return, your ending balance would be $96,083.53 with a 0.25% annual advisory fee, but just $89,542.39 with a 1% annual fee\u2014a difference of over $6,000. And the bigger your account balance and the longer your time horizon, the larger that difference becomes. Using the same assumptions from the example above, after 30 years, your balance would be $354,818.75 with a 0.25% fee, but just $287,174.53 with a 1% fee\u2014a difference of over $67,000. <\/p>\n\n\n\n We also think it\u2019s important to keep an eye on ETF management fees known as the \u201cexpense ratio.\u201d This is the annual fee charged by the ETF\u2019s issuers to manage and operate the fund, and it\u2019s expressed as a percentage of the ETF\u2019s assets. At Wealthfront, when we select ETFs for your portfolio, we focus on keeping those costs low, too. It all adds up.\u00a0<\/p>\n\n\n\n Taxes aren\u2019t inherently a bad thing\u2014they\u2019re usually a sign you\u2019re making money. But you can still take reasonable steps to lower what you owe so you can keep more of what you earn. At Wealthfront, we use software to automate tax-optimization strategies designed to lower your tax bill at no additional cost and for no additional effort.<\/p>\n\n\n\n Arguably the most powerful way we help minimize your taxes is through our Tax-Loss Harvesting service, which is available in all of our taxable Automated Investing Accounts<\/a>. Wealthfront\u2019s Tax-Loss Harvesting software monitors your portfolio daily for opportunities to sell investments that have declined below their purchase price, \u201charvest\u201d the loss, and then replace it with a similar investment so your portfolio\u2019s risk and return characteristics stay roughly the same. At tax time, you can then use those harvested losses to offset any capital gains and up to $3,000 of ordinary income if you have losses left over after that. <\/p>\n\n\n\n Our Chief Investment Officer Burt Malkiel wrote in a previous post<\/a> that tax-loss harvesting represents \u201cwhat we consider to be the only reliable way for investors to outperform the market, as it allows you to do so on an after-tax basis.\u201d (For more information about the research supporting our approach to tax-loss harvesting, you can read our white paper<\/a>.) Through the end of 2024<\/a>, we estimate that nearly 96% of participating clients who have used our Tax-Loss Harvesting for at least a year have received estimated tax benefit that exceeds fees paid to Wealthfront. On average, that tax benefit has represented a significant multiple of our 0.25% fee\u2014put simply, the vast majority of our clients come out ahead on fees because of Tax-Loss Harvesting alone. <\/p>\n\n\n\n Risk can feel like a bad thing, but in investing, that\u2019s not necessarily the case. The presence of risk is why you can generally get higher expected returns from investing than you can from holding cash. In other words, if you want higher returns, you have<\/em> to take some risk.<\/p>\n\n\n\n But not all risk is the same. It\u2019s important to take on what\u2019s known as compensated risk (risk that results in higher expected returns) but limit uncompensated risk (which can add volatility to your portfolio but doesn\u2019t necessarily result in higher expected returns). A good way to do this is through diversification<\/a>. Diversification is the practice of buying a variety of different, relatively uncorrelated investments with the goal of balancing both risk and reward in your portfolio. The idea is that when something happens in the news or the market, not all of your investments will respond to that event in quite the same way, and to some extent, you\u2019ll be better insulated from market volatility as a result. <\/p>\n\n\n\n At Wealthfront, we help investors manage risk in a variety of ways. Our portfolios are well diversified: Automated Bond Portfolios<\/a> hold ETFs from many issuers with a range of maturities; Wealthfront S&P 500 Direct<\/a> invests in stocks in the S&P 500\u00ae index, which covers roughly 80% of the US stock market; and our Automated Investing Accounts<\/a> include a globally diversified mix of both stocks and bonds. We also automatically rebalance these portfolios over time so your asset allocation doesn\u2019t \u201cdrift\u201d to become either too risky or not risky enough for your specific risk tolerance. If you have a well diversified portfolio and you rebalance it over time, you\u2019ll be in a better position to increase your risk-adjusted returns over the long run. <\/p>\n\n\n\n Ultimately, our goal is to help you build wealth on your own terms. That\u2019s why our philosophy is to help you focus on what you can control, and to avoid the temptation to chase investing fads or engage in market timing (like changing your portfolio based on short-term market movements). We hope that by building products that automate these best practices, we can make it even easier to meet your long-term financial goals with confidence. Investing can feel complicated\u2014it\u2019s easy to go overboard reading market commentary, chasing stock tips, and listening to what your friends and family members are doing with their portfolios. But Wealthfront has always believed that the stress associated with investing is optional. We automate award-winning research (like Modern Portfolio Theory, which won a Nobel Prize in […]<\/p>\n","protected":false},"author":10000,"featured_media":14134,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"inline_featured_image":false,"footnotes":""},"categories":[1282],"tags":[],"coauthors":[1270],"class_list":["post-17669","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-investing"],"acf":[],"yoast_head":"\nWhy we believe in passive investing<\/h2>\n\n\n\n
The importance of keeping fees low<\/h2>\n\n\n\n
The importance of minimizing taxes<\/h2>\n\n\n\n
The importance of managing risk<\/h2>\n\n\n\n
Build long-term wealth on your own terms<\/h2>\n\n\n\n
<\/p>\n","protected":false},"excerpt":{"rendered":"