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Author: yodaorange Big red star, 1000 posts Feste Award Nominee! Feste Award Winner! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 449458  
Subject: Investing for the masses Date: 12/20/2012 4:21 PM
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In working on the Financial Repression (FR) investment strategy[1], Yoda decided to take a step back and survey the earth. Considering whether or not to alter your investment strategy based on FR is NOT pertinent to the vast majority of investors. Same thing for a lot of other topics that Yoda posts on like Euro-Greece meltdown insurance or high frequency trading issues.

The broader question is “What should the masses invest in?” It might be pertinent for some percentage of METARites. If it is NOT pertinent to you, it is almost guaranteed to be pertinent to many folks you know.

This is similar to my post a few weeks ago whether using Edward Jones was better than nothing.[2] I concluded that it was better in certain circumstances.

This post addresses a very broad spectrum of investors. Here are a few examples of investors that would benefit from this strategy.

1. Investors that want to spend a minimal amount of time and energy on their investments.

2. Investors that have $5k or greater to invest and PLAN to continue adding funds over time. We would likely agree if your plan is to save a total of $5k over your lifetime, it is NOT worth your time or effort to do ANY investing. Stated differently, if you are not already a member of the spend less than you make church, this is NOT a sermon on why you should join.

3. Investors that are in the buildup phase of their investments, as opposed to the spend down phase in retirement.

4. Investors that do NOT need and/or want to discuss the financial planning in person on a consistent basis. If the investor needs to discuss investments, this plan is NOT the best choice. It might be better than the other choices that the investor makes though.

5. Investors that are prone to “chasing” last year’s winners or irrationally changing their portfolios due to emotions.

With that background, you will have to decide on your own if this fits or not.

The plan is a new company, Wealthfront.com (WF) that I think fills a large need.

1. WF is a web only investment advisor. You can call them with some financial questions, but they are NOT in business to provide comprehensive, personalized financial guidance.

2. The minimum account size to start is $5k. There is NO maximum.

3. WF’s fees are ZERO percent for account sizes of $25k or less. Their fees for larger accounts are 0.25%, regardless of how large the account it.

4. You can have regular brokerage, IRA, or trust type accounts just like a regular brokerage.

5. WF uses Apex Clearing for their “back office.” Apex is the “back office” for TD Ameritrade, Scotttrade and Raymond James amongst others. WF has NO ACCESS TO YOUR FUNDS. WF has “trading authorization” for your account. If WF literally goes out of business, your account is still your account. It has SIPC protection like all other brokerage accounts.

6. WF uses 6 different ultra low cost ETF’s, five of which are Vanguard. The ETF management fees are on the order of .15%. So the overall fees are VERY LOW, ~0.4%, compared to most alternatives.

7. WF has an algorithmic approach to determining the asset allocation between the 6 ETFs. It is based on your “risk tolerance” and WF’s portfolio optimization. They recently added Burton Malkiel in an advisory role so the optimization is on the “Efficient Frontier.”

8. They rebalance your account on an as needed basis without any effort on your part. There is no additional fee for trading ETF’s. There is no additional brokerage fee.

9. You can add money easily and it will be automatically allocated. You can take out money easily.

10. It is intended to be a “setup one time and forget about it” type approach.

11. Yoda’s opinion is that over the long term, this approach will outperform the vast majority of other investment alternatives that the masses use.

12. WF is very transparent about how the funds will be allocated. You can go on the website and see exactly how the funds will be allocated in your specific case. It will maybe take 3 minutes if you are a slow typist. It is that easy AND you can see in real time how the “risk meter” changes as you answer each question. You do NOT have to open an account to test drive the portfolio allocator.

13. WF is also very transparent that you can use duplicate their portfolio allocation with an outside account. Their value proposition is that it is worth paying the .25% to maintain and rebalance the account.

BOTTOM LINE is that Wealthfront likely would be an excellent choice for a very high percentage of investors. I dare say it would be the optimum choice, but that would be presumptuous. My guess is that they will outperform 80% to 90% of over investing options open to the masses. I recommend you take a brief look at WF if for no other reason to see what they offer. If it is not right for you, it might be right for someone you know.


YODA HAS NO TIES TO WF. YODA RECEIVES NO COMPENSATION FROM WF. YODA HAS NOT PERSONALLY USED WF, BUT PLANS TO DO SO SHORTLY.


Thanks,

Yodaorange


[1] Yoda Post on Financial Repression
http://boards.fool.com/financial-repression-why-you-should-c...

[2] Yoda Post on Edward Jones Brokerage
http://boards.fool.com/is-expensive-advice-better-than-no-ad...

[3] Wealthfront.com
www.wealthfront.com
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