In September 2017, I decided to run an experiment. I took my $50,000 emergency fund, split it in two, and deposited one half into a high interest savings account with Ally and the other half into a Wealthfront account. I have not touched either account in over a year. Here are the results of my experiment.
The Ally account grew 1.75% over 14 months to a total of $25,438.21 while the Wealthfront account grew 3.29% to $25,824.90. Out of curiosity, I also looked up how much Vanguard’s total stock market ETF (VTI) grew in the same period. If I had invested solely in VTI, I would have incurred more risk but my account would have grown 10.5% to $27,625.
Overall, I consider the experiment to be a success. I have really enjoyed Wealthfront and am seeing positive growth with fairly low risk. The website and Android app are both very easy to use, and I like looking at the retirement projection when I first login. Because I joined before April 1, 2018, I am getting $10,000 managed for free (as well as an additional $5,000 free because I was referred by another member). The remainder of my money is managed at the low rate of 0.25% per year.
But why would you want to use Wealthfront in the first place instead of just buying Vanguard funds?
In Unconventional Success, David F. Swensen, Chief Investment Officer for Yale University, describes the investment strategy that he has employed for over 30 years to manage Yale’s endowment fund, worth tens of billions of dollars. His advice boils down to three key points:
- Lower volatility by owning a portfolio of 6 different asset classes
- Rebalance your portfolio regularly to account for drift as each asset’s value changes
- Diversify within each asset class by purchasing low-cost index funds or ETFs from Vanguard or TIAA
The asset allocation he suggests in the Yale Model is:
- 30% US Stocks
- 20% REITs (Real Estate Investment Trusts)
- 15% Government Bonds
- 15% TIPS (Treasury Inflated Protected Securities)
- 15% Developed Foreign Stocks
- 5% Emerging Nations Stocks
You could easily get a Vanguard account and split your money up according to these percentages, making sure to rebalance every 6-12 months, or you could save yourself the hassle and pay Wealthfront a 0.25% annual fee to do the work for you. They use a similar investment strategy based on the Nobel prize winning Modern Portfolio Theory, where they first ask you a few questions to determine your level of risk tolerance and then choose an asset allocation that provides appropriate volatility for your comfort.
My risk score is 7.5 which results in the following target asset allocation:
- 35% US Stocks (VTI)
- 21% Foreign Stocks (SCHF)
- 16% Emerging Markets (IEMG)
- 15% Municipal Bonds (VTEB)
- 8% Dividend Stocks (VIG)
- 5% Natural Resources (XLE)
To me, it has definitely been worth the management fee, especially with the recent downturns in the market that have allowed Wealthfront to automatically harvest over $900 in tax losses by moving my investments from one asset class to another.
If you are interested, you too can get $5,000 managed for free by using this referral link.
Have you used Wealthfront or Betterment? Did you see similar results?