Betterment, wealthfront - ring a bell? A whole slew of automated robots have come off in recent years. They are basically a layer on top of the vanguard etfs typically that will operate on the "when" aspect. Like you, they also buy vanguard or ishares or what have you etfs. Typical investors mess with timings. They sell here and there, forget to rebalance etc. Enter automated trading which just sets the ratio to what you like say 50-50 or 70-30 and then forget it. It will automatically balance it periodically on said date or likely on limits getting reached and rebalance it. This is nothing but automation of the yearly or bi-annual rebalance that you may do or just spend 10 minutes per month or per weekend to check out the pie chart and then rebalance or better yet, get a balanced ETF and forget it.
These funds charge you another few percentage points over your expense ratio for this service. I think you are better off doing this on your own. But here is the key differentiator. Many of them tout automatic Tax loss harvesting. Many say these fees are worth the free time and no need to worry about rebalancing or tax loss harvesting etc. So this post will dwell more on tax loss harvesting.
To continue on what we said in the last post, tax loss harvesting is a simple principle of softening your losses by "harvesting" the loss and claiming this loss in your tax returns. Meanwhile, you continue to hold on to your investments and hope that it would go up significantly. Automated robots to etf level tax loss harvesting and get this additional value. While you can do the same at stock level too. To continue with the example that I gave previously, why would you want to hold on to a loser stock in this case? To some extent it colludes your ideas, clouds your thinkings and judgements and maybe compromises objectivity ? Why ? Take for instance you had C at 50 and then it went down to 5, you can of course hold on to it and then harvest this big huge loss down the line. Or you could keep harvesting it as it keeps going down. Which is in a way a fool's game. You are paying commissions here unlike the ETFs. Speaking of ETFs, I think this is good for maybe a 2 billion or 10 billion pool in an investment running into trillions of assets under management. If this was worthwhile the big houses of Vanguard and Fidelity would be all over it. In practice, this is not feasible or optimal. In theory it does not lead to effecient market hypothesis and maybe undermines other investors. Maybe the small investor can get some value but it harms the overall market interest or even the individual stocks due to constant selling pressure. So for ETF perspective, I dont think this trend would be widely adopted. But the likes of wealthfront might adopt this to differentiate themselves in the market and add that few values. Not to be harsh but back to the C example, instead of going down on it, if you are so determined, why not short this stock ? You can gain a ton by shorting it or maybe go the options route. I agree that options is more betting. While this is more objectively harvesting the loss and realizing the value. But then if you sell, you exited, you are out. Why not take this C position and put it in say WFC. That would have given you more money that the value can ever give you.
My point is simply this, in a straightforward world, you put say 100 in stock A which went to 50. You sell half your position here and put it in B which is at 50 now and is going to 100 in next two years. At the end of two years, you have made your loss and are essentially at the same principal amount. Your capital gains from B is offset by capital loss or tax harvesting of A. Simple as that. What is being sold these days is hold on to A and keep harvesting the loss. You will never exit this position then. But assuming you manage to separate all this out, the net gain or value you are talking is , subjectively speaking , not much. Why? Let us look at hedge funds. Many use this strategy already. You can call it loss harvesting or just focusing on a stock and buying and selling on a daily basis no matter what. Say there is a theoratical stock - like BAC or C which have huge volume and everyone trades it. Any daily trader would go for such stocks given the liquidity. Since there is volume, any small gain would help realize a huge margin. Similarly, a small loss means you get a huge red. Which you can promptly write off against your profit. You can do this ad infenitum on huge amount of money. In fact, there are many "market makers" and a huge pool of money which does such things. Many might go on the dark side too .. they notoriously call it "dark pool" just like "dark web" . Many are legally sanctioned for large institutions but not for individuals. All that aside, in market people just hold on, I mean even if you buy and sell like a computer to a buy and sell approach of a human that holds on for 10 years - in either case, you hold. That is the predominant position. One essentially is on waiting period. This holding period. And this is where one thinks. People like John Bogle said, ignore this, buy etf and let market do its own. If not, go the buffet way. Buffet says, do your homework well and hold on. But buffet does sell his investments too. He probably uses tax loss harvesting but I doubt on a daily basis. Maybe periodically when he sells a turd and landed a good capital gains on another. I dont have info on that. But you get the gist, the academic and good view of this is not to abuse it. What if IRS closes this loophole, will tax loss harvesting work in that case? So in this holding period, some other get nervous, they sell. Some hold on till x years. Some sell - it is just a mix of emotions from fear to greed to "I have hard earned money, I will just keep mine and not lose it and keep it fair and straight" to really anything in between. Tax loss harvesting is the guy who says, hey life gave a lemon, might as well make a lemonade. So fundamentally nothing wrong but it should not be core part or strategy. Maybe put a few bucks and see how it works. So it is basically not core strategy. It is one of the tools you have. More than ETF level, I am more concerned about the stock level. Except that the strategy here would be once you sell a dog, do not repurchase the full dog. Go for half dog, half cat. Because once a dog cant be trusted, lets not confuse further.
And always remember, this whole thing - investing etc. might get you that extra push but it never is going to literally make a millioinaire out of you unless you own it. You own your business and you have bought it low and then you sell it high. Literally, the wall street ones are the ones making money off commissions and legal structures rather than a super bet of seeing the stock going from 100 to 200. Anyhow, I distracted from the topic. At an individual level, it makes sense to use some services of automated advisors or robo advisors. But overall, at a stock level, I would still stick with focusing on market and not on tax loss harvesting. Unless you are a full time trader which by the way would be alarming if you are one and reading this blog :D
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