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Tactics for the Lazy Investor: A Native Guide to Investing

There are some outfits that can help you diversify a small portfolio of investment in a hope of retiring one day.

So, you know you need to save if you ever hope to retire. You’ve decided that the only place to get an adequate return on your money without the degree of personal involvement in starting your own business or flipping houses or restoring classic cars or whatever is to take a ride on Wall Street. You consider ETF’s the safest way to diversify a small portfolio, but you don’t want to fool with picking them yourself.

Some young Silicon Valley types are creating outfits that can help you because I just described the attitude toward investment held by a lot of… young Silicon Valley types.

Remember that when you are a small player, you must minimize your transaction costs. In an earlier installment of this series, I told you where you could buy a few blue chip stocks with no commission and any stock traded on a major exchange for a very small commission if you don’t mind market orders.

Sharebuilder goes a step further in that they have an app that will design a basket of ETFs geared to your risk tolerance and allow you to buy fractional shares in that basket, just as you could buy fractional shares of individual stocks at that brokerage. Unlike their regular accounts, which have no minimum, they require $200 to get started.

Now comes a new breed of investment advisors, riding down Wall Street with proprietary algorithms that will design a basket of ETFs just like Sharebuilder. For a really reasonable fee, they will also rebalance you periodically as the business cycle shifts to favor different sectors, and they even claim to have composed an algorithm to do tax loss harvesting by defeating the “wash sale rule.”

The wash sale rule is not from the SEC, but rather from the IRS. It holds that if you sell a security at a loss, but then you acquire either the same security or one “substantially identical” within 30 days, you lose the right to claim your tax loss. The wash sale rule applies even if you only buy an option on the stock you sold, and it can be violated if your spouse or any entity you control buys the stock back.

Tax loss harvesting requires navigating around the wash sale rule while remaining diversified. I’m telling you that algorithms that purport to accomplish this exist. I’m not telling you they work, because I don’t have personal knowledge of that.

The first of these new investment companies, Betterment, kicks in tax loss harvesting when your portfolio pops over $50,000. That’s going to take a while for the rookies this column is addressing, but if you are young and you keep after it, you will roll over $50,000 several times in a lifetime.

The computer at the Betterment website will want to know your age, your goals, and—we always keep coming back to this—your risk tolerance. Betterment requires no minimum balance to open an account, but if you are depositing less than $100 a month, they charge you a flat fee of $3 a month. There are no commissions on trades, either at the beginning or when they rebalance.

If you are depositing at least $100 a month, their management fee is .35 percent of your average yearly balance, assessed quarterly. That gets lower on a scale until you pop over $100,000, when it goes to .15 percent and stays there.

Notice that the fees get lower as your account gets richer. That’s normal, and you will find that conventional brokerage firms that offer assistance by a human being charge a lot more because, frankly, they don’t want the minnows. They want the whales and they will tolerate the normal fish because some of them will become whales. You will have trouble finding an assisted account at .25 percent up to $100,000

Trade King, which has carved out a market niche catering to minnows in the shark tank by offering commissions on stock trades at $4.95, charges from .5 to 1 percent, depending on the balance. The little fish pay more. Trade King offers five portfolios, with automatic rebalancing labeled from conservative to aggressive. Trade King does not allow you to hold any positions in the account that are not part of the management agreement and they require a $10,000 minimum balance to start. So, you see, “minnow” is a relative term on Wall Street.

The next of the new breed, FutureAdvisor, charges .5 percent. They are managers, not brokers, and they manage accounts through two reputable discount brokerages, TD Ameritrade and Fidelity. There are no commissions on the automatic rebalance, but there are commissions if you start with a stock account rather than a cash account, because they have to sell you out of what you have before they can get you into the ETFs their algorithm recommended. As a benchmark, TD Ameritrade’s commissions are $9.99 and Fidelity’s are $7.95, but there are no fees to open an account and no account maintenance fees.

Here is the major news you can use about FutureAdvisor: you can open a free account and run your goal though their ETF portfolio design algorithm for free! And you can come back in and get rebalancing advice indefinitely at no cost. The hitch is that you have to take the designed portfolio and go acquire the ETFs recommended, and of course you will have to pay commissions to your broker. I expect they let you use it for free because you would probably wind up paying more in commissions to rebalance than you would pay if you just had them do it for you for .5 percent and no commissions.

FutureAdvisor is not a brokerage, but it is insured by the Securities Investor Protection Corporation (SIPC). The SIPC exists to protect investors against losses when an insured manager or broker goes bust. It does not protect from bad market conditions and it does not pay off when the insured party is solvent. If the brokerage is solvent, you must take your claims to the Financial Industry Regulatory Authority (FINRA).

SIPC wants you to know that in the past 42 years, 98.7 percent of client assets were recovered from insolvent brokers before SIPC insurance kicked in. So, you may well ask, how did Bernie Madoff’s victims wind up broke? You had to be a very prosperous fish to invest with Madoff, and the man who took the Ponzi scheme to new highs would not steal from just anyone. You had to be able to afford him.

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SIPC insurance tops out at $500,000. That’s plenty to cover all of my portfolios, and I expect that’s the case for most of us. Most of us would not call ourselves “broke” if we had $500,000, but your mileage may vary.

Another new player, Wealthfront, turns around the usual fee scale and lets the little guys ride for free. There is no advisory fee on the first $10,000. Over that, .25 percent, and there are no commissions. Their attitude is summed up by this exchange on Wealthfront’s FAQ page:

What keeps me from investing $10,000 with you and mimicking your trades at a discount brokerage?

Nothing. But that kind of sounds like a pain in the neck when we only charge you an annual advisory fee of 0.25% (on assets over $10,000) to take care of all the trades in your account, as well as the periodic rebalancing. That being said, you are welcome to copy anything we do if you would rather do it yourself.

Wealthfront is SIPC insured and they do their trading through the discount brokerage operated by Charles Schwab. Continuing the report of online trading commissions for comparison purposes, Schwab charges $8.95, but you do not pay this on trades in an account managed by Wealthfront. The bad news is that it takes a $5,000 minimum to open a Wealthfront account.

The New York Times reported that the pioneer in low cost mutual funds, Vanguard, is moving in for the little fish with a plan to offer investment advice at .3 percent. The significance of the Vanguard move is that it’s hard to overstate how much Vanguard has done to cut costs for ordinary people. Mutual funds and ETFs with extremely low expense ratios remain Vanguard’s bread and butter and, yes, they offer a free tool to recommend a mix of funds tailored to the same data points as all of the companies mentioned: your age (which yields a time horizon), your risk tolerance, and how much you can afford to invest.

All of the brokers and managers I have mentioned support Individual Retirement Accounts (IRAs). This is important because IRAs enable you to accumulate savings tax free and even to deduct some of your IRA contributions on your federal income tax return. This is one more way to make a limited amount of savings grow much faster.

An alternative is the Roth IRA, the contributions to which are not tax deductible. You pay taxes on your savings at the front end, but when you withdraw your money in retirement, the withdrawals are tax free.

The choice between a traditional IRA and a Roth IRA should be driven by your prediction of what your tax bracket will be in retirement. I chose a traditional IRA because I expected my income to be lower after I quit working and therefore I would be in a lower tax bracket. This is the choice most people make and, honestly, the tax deduction for IRA contributions is a tempting carrot during your working years.

Traditional IRA or Roth IRA is a decision you have to make for yourself, but the important thing is to start saving when you are as young as possible. The less you can save the more important to start early and let the interest compound longer. The lower your working income the lower your Social Security payments will be and the more you will need some personal savings to see you though. Ten bucks a week. Even ten bucks a month. Just stash it in a discount brokerage account and forget it’s there except to the degree you have to pay attention to your investments.

When I started this series, I tried to explain why you need to save, even if only to eat a better quality cat food when you get old, and that a savings account is not saving, because you cannot get interest on your savings that exceeds the rate of inflation.

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The only safe strategy for ordinary people in the market is diversification, and the way to diversify when you don’t have a lot of money is with Exchange Traded Funds (ETFs).

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Even picking ETFs, I’ve shown, can be complicated and time-consuming. With this column, I’ve explained how you can get somebody else to do it for you at a reasonable cost.

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I started out showing you don’t need to invest much money if you do it for many years and now I’ve shown you don’t have to invest much of your time, either. I hope that if you are not saving now, it’s because you don’t want to save, not because you think you can’t.