My resolution for 2014 was to become an active manager of my own investments. I was 26, and financially responsible in many ways, but until that point, had completely ignored my portfolio. Let me back up to explain a bit.
My family fled Cuba shortly after Castro sent my grandfather to political prison in 1963. Back then, anyone who left lost everything. The government allowed my grandmother to take two dresses, one pair of shoes, and a coat — absolutely no money. Somehow managing to get to the U.S., she found herself broke in a country with a different native tongue, two small children, and without a husband for the next 15 years. Over time, she earned a doctorate, secured a professorship at that same University she attended and, after being eventually fired from it, published a textbook the year I was born (which is currently in its 11th edition). In the 90s, when her book began taking off, she hired a star advisor at the best private wealth management company in town to handle her rapidly growing account balance. I don’t blame her. There was a language barrier, on top of the fact investing is already scary.
Why is any of this relevant? Well, because of our colorful past, my family is weird about money. Most of my life, I had no idea how wealthy my grandmother was, as she has always lived the simplest life possible and still saves every penny she earns. A ton went towards building my investments, which, until half a decade ago, I barely even knew existed. My gratitude for her sacrifice coupled with such a hush-hush mentality left me incredibly nervous about even articulating my desire to take control of them. (Of course, I should’ve better predicted her ecstatic reaction to having one thing taken off her plate.)
Which brings me back to my portfolio. Now, don’t get me wrong — every investor’s style is different. Others might have been perfectly happy with how years of neglect had shaped it, but given my takeaways from business school and future goals, I wasn’t. My main concerns were the sheer number of holdings, monetary weighting toward cherry-picked company stocks, and tiny amounts spread across expensive mutual funds. Feeling overwhelmed with where to even begin, I tasked LearnVest to help me assess and redesign it.
As we TFD readers know, a good investment portfolio balances risk tolerance with potential reward to include a mix of (large/mid/small cap) stocks, bonds, alternatives, and cash. In other words, it’s diversified. Mine was not. In fact, three-quarters of it was domestic stock, almost all belonging to the large cap variety — much more than LearnVest recommends. It also turned out my net expense ratio averaged 1.6%, a number that only seems tiny. That’s the percentage of my assets disappearing every year to cover marketing, administration, and other costs of running the funds my money was sitting in (regardless of performance). As this Investopedia article points out, a hypothetical investment of $10,000 gaining a steady 10% every year in the market would lose 27% in value over 20 years with a ratio of just 2%.
Armed with a plan, I connected with my advisor to begin rebalancing. Getting to my desired asset allocation would require selling and thus taxes, so we decided to slowly sell off holdings that hadn’t done well to offset capital gains from ones that had, and minimize my overall tax burden. This practice is also known as tax loss harvesting. Things were improving, but a year later, my portfolio was still just as heavily skewed and expensive. The process itself was also incredibly draining. My advisor was full of opinions about which funds to move money into, and (surprise!) the ones he always liked best came with enormous fees. I’d push back, of course, but it didn’t matter, because the funds I couldn’t yet sell in a tax-friendly way left my overall net expense ratio right about where it had been.
Babysitting my portfolio and its manager was proving to be a futile and frustrating exercise. Then, sometime in late 2015, the term “robo-advisor” caught my attention. Basically, it’s an investment management service that has traded spreadsheets, manual researching, and phone calls in for algorithms. Nearly all work within notoriously low-cost index funds to design and constantly rebalance investment portfolios. Robo-advisors first emerged during the height of the Great Recession. Software mimicking the kinds of services they currently provide existed before then, but had been made available only to traditional advisors — not everyday investors. Robo-advisors’ exponential rise in recent years might reflect the lingering distrust many investors feel towards financial institutions since the stock market crash.
But despite clever marketing suggesting otherwise, there’s no such thing as a truly one-size-fits-all portfolio. Certain complicated financial situations (I quit my job and have a baby on the way!) and somewhat urgent goals (Get me out of debt!) are still better served by investment strategies crafted through a human being’s perspective (maybe your own!). There are a ton of robo-advisors out there, so researching all the nitty-gritty details, like account minimums, fees, withdrawal penalties, and so on to determine which one, if any, fits best is an absolute must. And if you’re the kind of investor that scares easily, beware. Reacting to the lows of the stock market cycle by making impulse withdrawals is way too easy (a few clicks, tops!), and no one is there to challenge those decisions.
Personally, software that would handle everything I was already doing, but better, faster and other Daft Punk-approved adverbs had never sounded so appealing. Facing any capital gains taxes at once also seemed worth it, considering how disappointing my own efforts to avoid them had been so far. Last February, I finally chose FutureAdvisor, spoke at length with one of their on-call advisors about my goals, and submitted answers to their basic questions about my approximate retirement age, current earnings, and risk tolerance.
A few days later and voila, my portfolio instantly transformed to the streamlined, cheap and diversified version of my wildest dreams. Since then, it has just slightly outpaced market levels, been rebalanced five times, and tax loss harvested twice — all the while enjoying a shockingly lower net expense ratio of 0.15%. The best part is, smart investment decisions like these will continue to be made automatically, constantly, and without an ounce of effort on my part.
The hypocrisy of resolving to be a more active investor only to inevitably pay for a software service that does all the heavy lifting that requires is not lost on me. However, I’ve never felt more confident and in control of my investments, which was sort of my larger point from the get-go. For me, a robo-advisor offers the sweet spot between the transparency of the DIY approach, and the perks of a fancy investment manager. Anyone looking for a set-it-and-forget-it investment style that’ll continually keep your portfolio in check should definitely consider it.
Laurin is a researcher, yogi, amateur photographer, and ex-Californienne living in Manhattan who suffers from an acute form of wanderlust. Follow her on Twitter here!
Image via Unsplash