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That's really debatable. After 10~15 years of investment in Betterment or Wealthfront, in all likelihood all of your investments will be in the black, and ther

by zeroer 9y ago

That's really debatable. After 10~15 years of investment in Betterment or Wealthfront, in all likelihood all of your investments will be in the black, and there will be no opportunities for loss harvesting. But you're still stuck paying the 25 basis points per year unless you sell (and thus incur the capital gains, anyways).

acchow 9y ago
False - this is not how tax loss harvesting works. Even if you are in the black every year, you can still benefit from it.
- zeroer 9y ago
  That is exactly how tax loss harvesting works. Here's a quote from Betterment: "What is Tax Loss Harvesting? Tax loss harvesting is the practice of selling a security that has experienced a loss." https://www.betterment.com/tax-loss-harvesting/ https://www.betterment.com/tax-loss-harvesting/
  - zeroer 9y ago
    I think it's telling that in their promotional materials designed to show their merits, Betterment shows a maximum time horizon of 10 years. I think they know that their strategy is much weaker on longer time horizons, yet the fees remain constant. 10 years may seem like a very long time to some people, but when I invest I'm thinking about time-frames of 30 to 60 years. Meanwhile you can tax loss harvest yourself with a little education. https://www.betterment.com/resources/investment-strategy/betterment-historical-performance/ https://www.betterment.com/resources/investment-strategy/bet...
  - sf_rob 9y ago
    Couldn't they employ tax gain harvesting for users that are interested in the short/long term capital gains differential in TLH? They don't do this, but I'm curious. i.e. cycle long term gains after one year of ownership so that they are more likely to produce harvestable losses in the next year. Obviously this prevents the basis gains of TLH, but wouldn't it be dwarfed for users whose long-term capital gains tax rate is much lower than their short-term capital gains rate?
    - tanderson92 9y ago
      Yes, but this only works for those who are exploiting a difference between their marginal tax rate and the LTCG rate. That is, those in the 15% marginal bracket whose LTCG rate is 0%. For other investors it is preferable to pay no taxes (continue to hold the security long-term even after it qualifies for long-term tax treatment)
    - zeroer 9y ago
      Yea, tax gain harvesting is definitely something you can do. Though it's harder than tax loss harvesting. You have to take into account the entirety of a person's tax situation to do it, as opposed to tax loss harvesting, which only require knowledge of the account transaction history, which Betterment and Wealthfront of course have. To do tax gain harvesting you have to wait until late December when you have most of the information, and you essentially have to complete an entire tax return.
  - acchow 9y ago
    No, you are not understanding how it works. Your portfolio can be in the black every single year, but you can still use TLH to improve your returns every single year by harvesting losses in individual securities. See: http://www.investopedia.com/articles/taxes/08/tax-loss-harvesting.asp http://www.investopedia.com/articles/taxes/08/tax-loss-harve...
    - zeroer 9y ago
      Thanks. I understand how it works. I still think it will be difficult to after 15 years.
hesdeadjim 9y ago
I've got a fair bit of money in Wealthfront and tax loss harvesting has directly saved me quite a bit of money over the last couple years. For instance, the beginning of last year was tumultuous and their tax loss harvesting let me realize around ~55k in losses. The market then shot back up and my investments were right back where they were barely a month later. Because I had a source of capital gains in 2016, I basically earned free money. So even if my investments were in the black in the macro scale, with tax loss harvesting I can realize additional gains from the inevitable dips that happen on the more micro scale.
- zeroer 9y ago
  I'm really talking about what happens after you've been invested with them for over a decade. Wealthfront has not yet existed for 10 years, so I know you haven't had your money invested with them for that long. The fact that tax loss harvesting can be beneficial is not in question. Once you tax loss harvest once, you lower your cost basis on the investment to less than you originally paid. You can only subsequently tax loss harvest on the same security to the extent that the value of the investment is lower than your new lower cost basis. This will become harder as time goes on and you have previously tax loss harvested many securities. Their white papers all use a timeframe of 10 years to show that Wealthfront is cost effective. I'm pretty sure they don't want customers thinking through all the implications of longer investment time horizons.
  - hesdeadjim 9y ago
    Oh gotcha with the cost basis raising over time. I wonder what strategies you could use to mitigate that. Perhaps buying a similar asset, holding that instead of the other, wait for the original to go down, and then re-purchase. Seems fragile and risky of course...
    - zeroer 9y ago
      > Perhaps buying a similar asset, holding that instead of the other, wait for the original to go down If you're presupposing the assets are similar, this is unlikely to happen to any significant degree. The standard way to increase your odds of being able to tax loss harvest is to own as many different uncorrelated securities as possible. You can take this to mean a fund per industry (as Betterment and Wealthfront do) or even to the extreme of only owning individual companies. That way, some are up and some are down, and you can TLH. The more slices you divide your portfolio up into, the longer you'll be able to do it. But I think realistically (especially factoring in inflation), this strategy will stop giving results before 15 years.

by zeroer 9y ago

acchow 9y ago

False - this is not how tax loss harvesting works. Even if you are in the black every year, you can still benefit from it.

zeroer 9y ago
That is exactly how tax loss harvesting works. Here's a quote from Betterment: "What is Tax Loss Harvesting? Tax loss harvesting is the practice of selling a security that has experienced a loss." https://www.betterment.com/tax-loss-harvesting/ https://www.betterment.com/tax-loss-harvesting/
- zeroer 9y ago
  I think it's telling that in their promotional materials designed to show their merits, Betterment shows a maximum time horizon of 10 years. I think they know that their strategy is much weaker on longer time horizons, yet the fees remain constant. 10 years may seem like a very long time to some people, but when I invest I'm thinking about time-frames of 30 to 60 years. Meanwhile you can tax loss harvest yourself with a little education. https://www.betterment.com/resources/investment-strategy/betterment-historical-performance/ https://www.betterment.com/resources/investment-strategy/bet...
- sf_rob 9y ago
  Couldn't they employ tax gain harvesting for users that are interested in the short/long term capital gains differential in TLH? They don't do this, but I'm curious. i.e. cycle long term gains after one year of ownership so that they are more likely to produce harvestable losses in the next year. Obviously this prevents the basis gains of TLH, but wouldn't it be dwarfed for users whose long-term capital gains tax rate is much lower than their short-term capital gains rate?
  - tanderson92 9y ago
    Yes, but this only works for those who are exploiting a difference between their marginal tax rate and the LTCG rate. That is, those in the 15% marginal bracket whose LTCG rate is 0%. For other investors it is preferable to pay no taxes (continue to hold the security long-term even after it qualifies for long-term tax treatment)
  - zeroer 9y ago
    Yea, tax gain harvesting is definitely something you can do. Though it's harder than tax loss harvesting. You have to take into account the entirety of a person's tax situation to do it, as opposed to tax loss harvesting, which only require knowledge of the account transaction history, which Betterment and Wealthfront of course have. To do tax gain harvesting you have to wait until late December when you have most of the information, and you essentially have to complete an entire tax return.
- acchow 9y ago
  No, you are not understanding how it works. Your portfolio can be in the black every single year, but you can still use TLH to improve your returns every single year by harvesting losses in individual securities. See: http://www.investopedia.com/articles/taxes/08/tax-loss-harvesting.asp http://www.investopedia.com/articles/taxes/08/tax-loss-harve...
  - zeroer 9y ago
    Thanks. I understand how it works. I still think it will be difficult to after 15 years.

hesdeadjim 9y ago

I've got a fair bit of money in Wealthfront and tax loss harvesting has directly saved me quite a bit of money over the last couple years. For instance, the beginning of last year was tumultuous and their tax loss harvesting let me realize around ~55k in losses. The market then shot back up and my investments were right back where they were barely a month later. Because I had a source of capital gains in 2016, I basically earned free money. So even if my investments were in the black in the macro scale, with tax loss harvesting I can realize additional gains from the inevitable dips that happen on the more micro scale.

zeroer 9y ago
I'm really talking about what happens after you've been invested with them for over a decade. Wealthfront has not yet existed for 10 years, so I know you haven't had your money invested with them for that long. The fact that tax loss harvesting can be beneficial is not in question. Once you tax loss harvest once, you lower your cost basis on the investment to less than you originally paid. You can only subsequently tax loss harvest on the same security to the extent that the value of the investment is lower than your new lower cost basis. This will become harder as time goes on and you have previously tax loss harvested many securities. Their white papers all use a timeframe of 10 years to show that Wealthfront is cost effective. I'm pretty sure they don't want customers thinking through all the implications of longer investment time horizons.
- hesdeadjim 9y ago
  Oh gotcha with the cost basis raising over time. I wonder what strategies you could use to mitigate that. Perhaps buying a similar asset, holding that instead of the other, wait for the original to go down, and then re-purchase. Seems fragile and risky of course...
  - zeroer 9y ago
    > Perhaps buying a similar asset, holding that instead of the other, wait for the original to go down If you're presupposing the assets are similar, this is unlikely to happen to any significant degree. The standard way to increase your odds of being able to tax loss harvest is to own as many different uncorrelated securities as possible. You can take this to mean a fund per industry (as Betterment and Wealthfront do) or even to the extreme of only owning individual companies. That way, some are up and some are down, and you can TLH. The more slices you divide your portfolio up into, the longer you'll be able to do it. But I think realistically (especially factoring in inflation), this strategy will stop giving results before 15 years.