There is a popular car insurance commercial featuring someone who “just saved a ton of money by switching to GEICO.” How much is a ton of money? $400? Well, by that measure we just saved more than “100 tons of money” or a whole century worth of car insurance savings. And we didn’t do so by switching, but by not switching our brokerage account. Ka-Ching, how easy was that?Read More »
A lot of economic and financial research deals with behavioral biases, those occasions where the mind plays tricks with us and leads even very intelligent people down the path of irrational and sub-optimal decisions. Other bloggers have pointed out some of these biases before, see Plan Invest Escape on cognitive biases. Also, Northern Expenditure wrote an interesting post on the temptation of instant gratification over saving for the future. Among all the different biases, Mental Accounting is not that well-known but it’s one of the most fascinating. Mental accounting, sometimes called Framing, shows up in human behavior in the following ways:
Intentionally or unintentionally creating different buckets of money and ignoring the fact that money is fungible; displaying different degrees of risk aversion and/or different propensities to consume out of different buckets.
Quite intriguingly, in personal finance the mental accounting bias is not only committed frequently, sometimes it’s even celebrated as a great innovation. It’s not a defect, it’s a feature! Some of the well-known financial gurus fall for this fallacy and are not even ashamed!Read More »
Tax Loss Harvesting is the rage now. Robo-advisers do it for you, and every DIY saver should seriously consider the benefits. Let’s look at what Tax Loss Harvesting is, how and why it works and how large (or small) the expected benefits can be.Read More »
- Most investors will get much smaller excess returns from the tax savings than what the Robo-advisers claim.
- Robo-advisers pick an asset allocation that may have tax inefficiencies built in for some investors, worth at least several basis points of annualized returns.
- Smart investors should still perform Tax Loss Harvesting, but it’s best to DIY because the benefits may not outweigh the Robo-adviser fees, especially if taking into account some of the potential inefficiencies introduced in the Robo-adviser target portfolios.
In our earlier post we showed how to be your own DIY Robo adviser. That post got quite long and even then it didn’t deal with all the issues of Robo advisers and especially tax loss harvesting (TLH). Here are some additional thoughts and caveats about TLH, Robo-advisers and their – in our opinion – slightly “creative” marketing practices.Read More »
We don’t use Robo-advisers because their services can be easily replicated with zero fees by smart frugal retirement savers. Tax loss harvesting, one of the Robo-adviser tasks, is also easy to perform yourself and we have been doing it since beginning to save in taxable accounts. Of course, once we are retired, tax loss harvesting is much less useful and for some early retirees, it is even completely ineffective. Moreover, investing only a small portion of your portfolio with a Robo-adviser, and managing the rest yourself is a bad idea because, among other reasons, some of your own trades could potentially invalidate the tax losses in the Robo account.