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- Overview and Algorithm Introduction
- Nobel-Prize Winning, Long-Term Strategy
- Index Investing
- Dynamic Fund Selection
- Investing Globally
- Tax-Loss Harvesting
- Smart Rebalancing
- The “Efficient Frontier”
Comprehensive Wealth Management
At FutureAdvisor, we believe that long term, fully diversified investing provides the best results over time. When you combine that with the diligent algorithmic monitoring that auto-rebalances your accounts, identifies tax-saving opportunities daily and manages all your multiple accounts, instead of just one, it’s a service that’s hard to beat.
We bring our advice to you, and manage money in accounts in your name, not ours, with custodians you trust. We hold all your assets with Fidelity or TD Ameritrade, so you know that whatever happens, your wealth is safe, and always accessible through a third party. Since we can manage all of your accounts together, it means we can place your investments tax-efficiently and choose the most suitable ETFs for your situation. Cookie-cutter investing leads to cookie-cutter results - that’s why everything we do is personalized based on the details you share with us – your risk appetite, age and the needs you express to our financial advisors. That makes us one of the most comprehensive services available.
Three Key Principles
Diversification is a critically important tool available to every investor. We follow a ‘buy and rebalance’ strategy which invests in a diversified set of asset classes through low-fee funds. Our investment universe covers a global set of investment opportunities while remaining compact enough to create clarity of purpose for each investment.
- Risk management
We believe that a retirement portfolio should reduce risk as retirement approaches. This principle is built into our methodology through investment glidepaths, which decrease your portfolio’s allocation to equities and increase your allocation to bonds over time as you approach retirement. Your personal risk preferences determine which glidepath is most appropriate for you.
- Tax awareness
Our methodology incorporates the tax consequences of investment decisions where appropriate, whether allocating your holdings in a tax-efficient way (e.g. bonds in tax-sheltered accounts), avoiding unnecessary capital gains taxes, or opportunistically harvesting tax losses.
Our Investment Algorithm
Our methodology has two components, an asset allocation strategy that determines your optimal target asset allocation and a portfolio management algorithm that handles the day-to-day work of keeping your portfolio allocation close to your optimal target. Your target asset allocation is computed using several inputs and assumptions including FutureAdvisor’s asset class universe, your investment horizon (e.g. years to retirement) and your personal risk preferences. The portfolio management algorithm analyzes your portfolio daily to determine how to invest new cash deposits, rebalance your portfolio*, or harvest losses for purposes of tax reduction.
Your Asset Allocation
Our portfolio recommendations are based on your information. Here’s why:
- Asset classes
Asset classes are groups of securities that share similar risk characteristics. These security groups can be defined in broad categories, such as stocks and bonds, and in finer categories, such as domestic stocks vs. foreign stocks. Our use of asset classes simplify the investment universe, consisting potentially of of thousands of individual securities, into a more tractable set of investment options.
- The risk-reward trade off
The reward and the reason for investing is the potential for positive investment returns. Our investment methodology uses long run evidence on the returns delivered by different asset classes as a key input.
However, investment portfolios are exposed to various kinds of risks, including domestic and foreign economic performance, interest rate, inflation, and more. Your overall portfolio risk is the result of the interactions between all the risks within your portfolio. Volatility is a way to measure of your portfolio risk in a single number. It represents the variability of the returns you will likely experience. For most diversified portfolios, volatility will vary between 5% (less risky, mostly bond portfolio) and 15% (riskier, mostly stock portfolio).
When investing, just as with any other purchase you make, you want a good deal. In the language of investment management, you want an “efficient” portfolio**, or one that is receiving the maximum reward for the level of risk taken. However, there is not just one efficient portfolio. There are many efficient portfolios, each has its own risk level, and within this set of efficient portfolios, there is a trade-off between reward and risk: higher risk has historically been associated with greater reward.
Below, we'll explain how we construct well-diversified portfolios that are efficient in terms of their risk-reward tradeoff, and how we recommend an appropriate risk level for your portfolio.
Our asset allocation strategy incorporates Modern Portfolio Theory, which suggests that investors should build portfolios that are as well diversified as possible among assets expected to provide positive long term return. Diversification happens at two levels: within each asset class and between the asset classes. Both kinds of diversification are necessary to hold an efficient portfolio.
- Diversification within an asset class
For a given asset class, we prefer to invest in a large set of companies, which greatly reduces company risk. Company risk is your portfolio’s exposure to any single company, corporate bond, real estate investment trust, etc., and these risks are not worth taking, they are uncompensated. By investing in a large set of companies,individual company risks primarily cancel each other out, leaving only compensated market risks.
For example, the Vanguard Total Stock Market ETF attempts to mimic the returns of the CRSP US Total Market Index, which is based on the returns of over 4,000 US stocks. ETFs are an effective way to gain exposure to an asset class, removing the excessive risks specific to concentrated positions in individual companies.
- Diversification across asset classes
This avoids over-concentration in certain market risks, the portfolio risk caused by larger economic factors. Unlike company risk, which are not compensated and which we prefer to avoid as much as possible, market risks are the source of long term return and cannot be avoided if we want to achieve higher levels of returns.
Some market risks are off-setting to one another. For example, in recent times interest rate risk has frequently helped to offset economic risk, since when the economic outlook turns down, long term Treasury bonds yields have fallen and their market values have significantly increased. Use of multiple asset classes helps take advantage of these off-setting behaviors to reduce overall portfolio risk, a classic example of beneficial diversification.
Investment Time Horizon and Risk Tolerance
There is no single right answer for how much risk you should take. There are many well-diversified portfolios, each with its own different risk-reward tradeoff. Jack Bogle*** holds a 50/50 portfolio, while Warren Buffet has recommended 90/10****. Our recommended risk level is based on your risk tolerance and our investment team’s views on how to best save for retirement.
We believe investors are more capable of taking on high risk, high reward portfolios early on and should reduce risk as they approach retirement. Therefore, your target portfolio follows a “glidepath”, which is an evolving stock/bond split that adjusts to be less risky as you approach retirement. We offer three different glidepaths, the assignment to which particular one is based on your ability to bear risk.
Our Asset Classes and Funds
In order to properly diversify your portfolio, we select a set of asset classes which provide exposure to diversifying, compensated risks. However, having more asset classes is not always better, and finding the right mix and number is a balancing act. Although having more asset classes generally helps diversification, there are diminishing returns to adding additional ones. The availability of liquid, low cost, representative ETFs can also be a limiting factor. Lastly, having too many asset classes will interfere with the human interpretability of our recommendations. Our 12-asset class universe aims to strike a balance between these trade-offs.
We prefer ETFs over mutual funds because they are better suited to an automated portfolio management algorithm. ETFs trade intraday (mutual funds trade once a day) and ETFs do not have minimum required investments, making them a better fit for automated advisors.There may be several ETFs available to represent each asset class, from which we choose two or three, as tax-loss harvesting requires having multiple ETFs per asset class. Our main considerations are low management fees, high liquidity (low bid-ask spread), fund size, fund age, and fund family reputation.
Our ETF Whitelist
VTI, IVV, SCHB
VB, SCHA, IJR
VTV, SCHV, IVE
International stock market
VEA, SCHF, IEFA
International stock market,
VSS, SCHC, SCZ
International stock market
International stock market
VWO, SCHE, IEMG
Domestic interest rates
SCHZ, AGG, BND
Foreign interest rates
BNDX, IGOV, BWX
Domestic real estate
International real estate
VTIP, STIP, STPZ
Managing Your Portfolio: Main Features
Our management algorithm is a mathematical optimization engine that decides daily if trading is beneficial to your portfolio. It weighs the need for rebalancing against transaction fees, capital gains taxes, and other costs.
A portfolio usually drifts from its target allocation over time and periodic rebalancing is required to keep it on target. For example, if stocks outperform bonds, an on-target 50/50 stock/bond portfolio could become a 60/40 portfolio, deviating from the target allocation and risk level. Keeping your portfolio balanced is a major factor in our algorithm’s decision-making process.
Our algorithm considers tax consequences as part of the rebalancing process, and will only realize long-term capital gains if the benefits from improved diversification are sufficient to justify it. Additionally, our portfolio rebalance algorithm will not realize over $200 in short-term capital gains taxes.
Tax-loss harvesting is an investment technique that helps save you money by deferring taxes. If the value of one of your investments falls, we can sell the position to realize the loss and use it to offset taxable gains elsewhere in your portfolio. Our algorithm will prevent wash sales that invalidate the tax loss^, and we do not require a minimum balance for this service.
Other Considerations in Managing Your Portfolio
Our algorithm also considers:
- Transaction and trading costs
Our algorithm considers per trade fees^^ and bid-ask spread cost. These two considerations are important to prevent trading that is of small benefit.
- Tax efficient asset placement
Bonds and real estate assets generate high amounts of taxable income. To the extent possible, our algorithm places such assets into your tax-advantaged accounts.
- Withdrawing cash
If you need to withdraw cash from your portfolio, our algorithm will sell the appropriate holdings to raise cash while keeping your remaining assets well-diversified.
*Due to the nature of the financial markets, portfolios will drift from their targets over time, we will rebalance them towards the target allocation periodically.
** Whether any portfolio is considered efficient depends on introducing mathematical and statistical assumptions.
***Investing Legend Jack Bogle’s Retirement Advice, Wall Street Journal, May 31, 2017.
****2013 Letter to Berkshire Hathaway Shareholders , Warren Buffett.
^Wash sales can still occur due to trades outside your FutureAdvisor-managed accounts.
^^These fees depend on the custodian and product.