I currently have funds in several sources. Individually owned stocks and ETF’s make up my brokerage account. I also have investments at a Robo Advisor, Betterment, where the machines decide where to put my money. Additionally, the 401K with my current job has some high fee mutual funds, don’t really have much of a choice there if I want to get the tax advantages of a 401k.
About five years ago I decided to move most of my non retirement funds over from my brokerage account over to Betterment. Then, during the course of the current pandemic, I moved the funds from Betterment back to a brokerage account. I sold a lot of my Betterment funds in March of 2020 and quickly reinvested the funds in my brokerage so I was able to take advantage of the subsequent upswing.
Some of the investments I made in my brokerage account since have done extraordinarily well, and as a result I ended 2020 up a lot. For instance, Peloton PTON is up 250% from where I bought it. Obviously not every investment has done this well, but I have been happy with my portfolio performance overall, and I think I have done better than I would have done if I just kept the money in Betterment and rode the current wave back up.
That being said, was the last year just a fluke. Research says that investing in an index fund will generally produce better results than trying to pick individual stocks, as I am trying to do. It is possible that the pandemic created a once in a lifetime event for stocks such as Peloton, Zoom, Crowdstrike, and Amazon, all of which I managed to get into in a early stage of the pandemic. I don’t think I had any particular insight with these, I just got a whole lot of dumb luck.
The Excitement of Stocks
There is however a certain amount of excitement you get out of picking stocks, as long as they go up, which you would not get from just dumping everything with the bots. Its exciting seeing your Peloton stock go from under $30 to over $150.
I wouldn’t get that level of excitement by using a robot advisor, even if some of your ETF’s contain Peloton. Sure, you would still see some of the gains, but what you see would not be very measurable, because of the diversification you get, your gains would be drown out by the ETF’s other positions. What is the excitement that comes from seeing that VTI is up .25% for the day.
There is the other side of the spectrum also, the downside that comes with individual stocks, and the fact that you could loose you entire position if you made the wrong bet on the wrong company. As I write this ,the whole GameStop saga is unfolding, which could have found me on the wrong side of that trade if I went with my feelings there. I ended up putting my thoughts on that in a separate post.
The Stability of the Machines
Using a robot advisor doesn’t mean absolute stability. There is still the risk of market decline, which can be pretty steep. But on the opposite side of going into individual stocks, the value is unlikely to plummet to zero, as the machines use many ETF’s which themselves contain many different stocks. The chances of me losing all my money, though not impossible, is extremely remote. Likewise, if, say Amazon gets hit with an anti-trust suit, causing their share price to collapse, the value of my Amazon stock could, in theory go to 0. However, Amazon is also part of some of my ETF’s in the automated funds. If Amazon’s stock price goes to zero, that would have an impact, but thanks to diversification, it wouldn’t wipe out the ETF.
ETF’s give me the diversification so if a single company does poorly its impact on me would be limited. I do hold some ETF’s in my individual brokerage, such as ICLN, for clean energy ETF’s, as well as IEUS, to give me exposure to European small caps. Both of these funds are pretty specialized and would not be used by Betterment, as they tend to invest in the broader index ETF’s such as VTI for total market exposure, or VOE for Mid Caps. There are a couple of bond ETF’s that are in both my Betterment account and my individual account, but that’s mostly because although I do recognize the role that bonds play in a diversified portfolio, I have no idea how the bond market works, so I just buy into it with the ETF’s. There are potential tax implications in that however, more on that below.
An issue that is coming up with these individual stocks is taxes. I think the positions I have in companies like Amazon, Peloton, and Crowdstrike are ready to be sold, however, I haven’t had the positions for a year yet, so selling them now would result in a higher tax rate than if I held them for a year, and I could then use the long term capital gains rates. Having those individual stocks creates a fear of selling. Not only is there the fear that the stocks could go higher after I sell, with my non retirement accounts there is also the fear of the tax impact, and what the sale will do to my tax bill at the end of the year.
With Betterment, I didn’t really have to pay taxes, so long as I just held the funds in the account. Sure, I was making money, and sure, at some point, when I sell, the IRS is going to come looking for their share, but for the most part, betterment will sell a few funds here and there to keep my portfolio allocation in balance, and I would get the occasional dividend, which would be taxable. They would however also use Tax Loss Harvesting to reduce my taxes when it comes to tax time.
Tax Loss Harvesting however presents its own issues when the same ETF is in both my brokerage account and my Betterment account. For instance AGG is in both accounts. If Betterment, sold my shares of AGG at a loss as part of Tax Loss Harvesting, I should be able to claim that loss on the following years taxes. There is an exception however if I were to buy AGG within 30 days, it would be considered a wash sale, and I would not be able to claim the loss. The robot’s algorithms keep me from buying that same ETF on Betterment’s side, but they can’t prevent me from doing that in my brokerage account.
Balancing Things Out
I should work to achieve a healthy balance between the investments I manage and those managed by the machines. With the market, diversification is the only free lunch, and I need to work to balance the excitement of holding individual stocks, with the stability that comes from the machine managed funds.
Disclaimer: Investing involves risks, and nothing in this post should be construed as financial advice. Risk of investments includes the loss of principal, which I can’t assume liability for. Please consult with an actual financial advisor for advice.