Today we're going to compare my free investing portfolio that was created by a computer to
a hand-catered portfolio from a financial professional that cost me over $100,000 to
see if paying for expensive investing tools and advisors is really worth it.
Alright, let's jump right into it.
What is going on everyone I hope you are all having a fantastic day.
So today I want to help you figure out if you need some fancy financial professional
to create a portfolio for you or if the free and simple strategies that I often talk about
truly are able to stack up in the long run.
So we'll be comparing my very own Wealthfront portfolio that costs me nothing and was created
by a robo advisor also known as a computer to a portfolio from a company called Personal
Capital that with the fees and minimum investing requirements will cost me several $100,000
over the course of my long term investing.
Neither Wealthfront nor Personal Capital are sponsoring this video and I do personally
use both of these products however this is not a comparison of these platforms it is
a comparison of a free portfolio to a very expensive portfolio.
Alright so first let's start off with my personal Roth IRA which cost me nothing and was made
entirely by a computer with no human intervention.
Now before you all go firing off in the comment section yes I am aware that Wealthfront has
a management fee of 0.25%, however full transparency, I've referred a lot of people to this platform
and therefore have accrued a large amount of management free dollars but don't worry
I understand that is not applicable to your average user so when doing our comparison,
later on, I will be accounting for that management fee, and we will discuss the tax-loss harvesting
feature that Wealthfront uses to offset that management fee.
Alright so this particular account through Wealthfront that we're going to breakdown
is my Roth IRA and again this isn't a review of Wealthfront but basically, the way most
Robo advisors work is they are going to ask you a few questions and assign you a risk
score and this is going to determine how aggressively your money is invested.
Then from there you basically just put money into this account and they automatically invest
it for you and that's pretty much it.
So in this portfolio, the Robo advisor has invested my money across U.S. stocks, foreign
developed stocks, real estate, emerging market stocks, foreign market bonds, corporate bonds,
and keeps a little bit of cash on the sidelines as well.
You can see the breakdown by percentage of my Portfolio here with U.S. stocks being by
far the largest at 33% and specifically if we click on that sector you can see that it
is investing in VTI which is the vanguard total stock market ETF.
For foreign developed stocks which is my second largest category at 22%, they are investing
in VEA which is the vanguard VTC developed markets ETF.
Now if you want to see a full line by line breakdown of this entire portfolio I will
link to that video in the description but over the past five years which is about when
I started investing in this portfolio, it has averaged an annual return of 10.03% and
since this specific portfolio was created in 2013 it has averaged an annual return of
8.28%.
So that's a fairly decent return for really any portfolio but there are a few really important
features that could save you 10s of thousands of dollars in the long term.
Now again these are things that wealthfront offers but really every robo advising platform
has features like this and perhaps my favorite is what's called tax loss harvesting.
Without boring you to death essentially the computer is going to strategically sell certain
investments when they are at a loss in order to offset the taxes that you owe on your profits.
That might sound super confusing and honestly, it kind of is if you're a casual investor
but again the beauty about having a computer do everything for you is that you don't have
to do anything.
They are also going to automatically rebalance your portfolio for you to make sure that your
sector allocations remain in balance and if you decide to do so which I do recommend,
they will also reinvest your dividends which can significantly increase your average annual
return over a long period of time.
Obviously no matter where you invest in certain ETF's whether it's true it row below advisor
or you go and buy it on your own, there are oftentimes fees associated with specific ETF's
however that is going to apply no matter how you buy a particular fund so for the sake
of simplicity we are going to remove that from the equation in today's video but that
is something you want to keep in mind.
And like I said earlier, Wealthfront specifically does charge a 0.25% management fee however
you can get up to your first $5000 managed for free if you are a new user so I will leave
a link in the description if you want to sign up but as you will learn in a second, even
if you have to pay that 0.25%, that is nothing compared to what a human professional is going
to charge and the tax loss harvesting feature offsets that fee for like 90% of Wealthfornt
users.
But is it worth paying that higher fee and are the returns that much better?
Well, let's take a look.
Obviously, every portfolio is going to look completely different because if you hire a
financial professional, they are likely going to sit down with you to learn more about your
investing goals and where you're at financially in general, and create a catered portfolio
based on your response.
So what I've done is pulled my own portfolio suggestions from Personal Capital and compared
them to averages for their higher tier clientele through their premium service that requires
at least $100,000 in investments.
And up to your first $1,000,000 the service costs 0.89% each year meaning if you build
up a substantial investing portfolio of hundreds of thousands or even millions of dollars in
the long term, at 0.89% you're looking at potentially tens of thousands of dollars per
year once you get into those larger numbers.
I will mention that the fees do get lowered slightly as you have more invested but again
we're talking multi illion dollar increments in that case so for today's example we'll
keep it to that sub $1,000,000 portfolio.
So similar to our free example, this premium investing service offers several portfolio
options such as aggressive, balanced, growth, moderate, and a bunch of others.
So for a fair comparison since we are in a higher risk score or more aggressive portfolio
with our free example, we're going to look at the aggressive portfolio for our premium
example.
So this particular portfolio has 60% invested in domestic equities which is a fancy way
of saying U.S. stocks, 25% in international equities, and much smaller percentages and
things like domestic and international fixed income assets, alternative investments, and
cash.
So the first thing that probably sticks out to you is the fact that the investment in
U.S. stocks is nearly double what the aggressive portfolio from our free example was.
Whether that's a good or bad thing is totally up to you but if we look at the annualized
return which in this case is over a 30 year period, it states that it averaged 9%.
Now it is not fair to compare that to the 10.03% number that we looked at earlier because
that was over just a five-year period and this is over a 30 year period which included
one of the largest market pullbacks in modern history.
But if we take the annualized returns with those percentage breakdowns over just a five
year period, it averages out to just 7.4% and with the data that I was able to access,
those are returns starting in 2008 and going for five years after that which as you probably
know was a pretty steep recovery for a lot of industries because of that insane pullback
in 2007 and eight.
So for the sake of comparing apples to apples and giving you a final verdict, let's say
you invested $100,000 at the start of that five-year period and made no additional contributions
to either portfolio.
Well with the professional handpicked portfolio we had an average return of 7.4% over 5 years
and that portfolio costs us 0.89% each year again removing the various small fees that
specific ETF's and mutual funds may charge.
So that means that after five years our $100,000 would turn into $142,896 but we would take
on $5,823 in fees meaning that after five years of investing this professional handpicked
portfolio would turn into $137,073.
Not too bad over such a short period of time but if we take our five-year return of 10.03%
and the fee of 0.25%, our portfolio created by a robot would turn into $161,270 and even
after paying $1,823 in fees, we would be left with $159,446 after five years which is $22,000
more then the much more expensive handpicked portfolio.
Obviously, we have limited data to run these accurate numbers off of and that's why we're
only able to do a 5-year period, however, if we were to extrapolate those numbers over
say a 40 year period with the principle, fees and returns that we just talked about, the
professional portfolio after subtracting fees would amount to $1,246,279 and again that's
after subtracting nearly $500,000 in fees while the less expensive portfolio created
by a robot would amount to a staggering $4,177,621 even after subtracting the fees.
That's a difference of nearly $3 million over a 40 year investing timeline.
The numbers speak for themselves however I am well aware that there are a ton of unknowns
in the examples I'm giving and we're making a lot of extrapolated assumptions, fees that
we are not able to account for, the obvious advantages of having a real human in your
corner, and a ton of variables that are simply not accounted for in this particular example.
However, with that large of a difference over a long period of time, it's pretty obvious
that no matter what numbers we used, a huge factor in your long-term investment growth
is the fees that you are paying.
Now again this is by no means a pitch for one specific strategy or a specific platform,
you need to do what you feel is best for your investing journey.
And truthfully when I started writing this script, I did not crunch any numbers and did
not know what the outcome would be And while I had an idea that this would be the result,
the difference in the final value after 40 years was much greater than I could have ever
anticipated.
So in today's example, our robo advisor beat the handpicked very expensive portfolio by
nearly $3 million but of course, these are just the numbers that I crunched so I would
love to know what you think of this debate down in the comments section and whether you
prefer a handpicked portfolio from a professional or you'd rather just use a much more affordable
robo advisor like wealthfront.
Again you do what you want with your money but if you do want to sign up for wealthfront
I will leave that link down below where you can get your first $5000 of investments manage
for free.
Be sure to hit the like button and subscribe to the channel if you'd like to help support
me and check out some of my favorite financial tools down in the description below many of
which will give you some free money when you sign up and of course thank you so much for
your time I really do appreciate it take it easy and I'll see you in the next one!