Betterment vs Wealthfront vs Vanguard: An experiment

betterment wealthfront vanguard expriment
A comparison of Betterment, Wealthfront and Vanguard in a short-term investment experiment.
/ April 12, 2015

An experiment in investment with three robo-advisors: Betterment, Wealthfront, and Vanguard.

Seems like we are living in a “robo advisor” boom, or bubble. It’s a new crop of computerized financial planners. There is a new one every few months. Charles Schwab recently launched their animal that they call ‘Intelligent portfolio‘.

What are robo-advisors anyway? From Wikipedia:

Robo-advisors are a class of financial adviser that provides portfolio management online with minimal human intervention. While their recommendations may vary, they all employ algorithms such as Modern portfolio theory that originally served the traditional advisory community, which has relied on algorithmic templates to conduct portfolio management since at least 2005.

So far, I had been using Betterment with good results. However, I want to give Wealthfront and Vanguard a shot. Maybe it’s the fear of missing out, but I would like to see for myself how they perform on a level playing field.

To experiment, I will invest $20,000 in each service. There will be two accounts created in each service — one with 90/10 split (90% stocks, 10% bonds), and the other with 80/20 split. So, there will be 6 accounts in all. The experiment will begin this Friday (4/10/2015) by which time the funds would have been deposited in the three services.The experiment will be run for exactly one month. Let’s see how they stack up against each other. I am going to base the comparison solely on the net profits that I will yield. I am not going to factor in their customer service, website user experience, or any of those things that are also important.

Wealthfront’s claim: Invest For Less Than A Night At The Movies. Wealthfront will manage a $100,000 portfolio for less than $20 per month. You’ll also pay no commissions or other account fees.

Betterment’s claim: Betterment is the smarter automated investing service that provides optimized investment returns for individual, IRA, Roth IRA & rollover 401(k) accounts.

Vanguard’s claim: On average, other mutual funds are 5 times more expensive than ours. Vanguard is the world’s largest mutual fund company, with about $2.4 trillion invested in the U.S. in more than 170 index, active, and exchange-traded funds.

Of course, I want to maximize my profits long-term, and not risk losing any money in this cockfight. From what I hear, all three services are good, so I think it’s a manageable risk for 30 days. On the 31st day, I will continue with the best performing robot (for me), and close the other two.

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Update 4/11/2015:  The experiment will begin on Monday 4/13/2015.

Update 4/13/2015:  Funds deposited in all accounts except WealthFront 80/20.

Update 4/14/2015: The starting gun has been fired…Wealthfront 80/20 may need to wait for another day to get the amount deposited.

Update 4/15/2015: Wealthfront is officially in the race starting today.

Update 4/16/2015: Betterment seems to be doing well so far.

Update 4/17/2015: The stock market was doing badly today — many of the stocks that I own were down. So you can see, the 80/20 accounts took a softer blow than the 90/10 accounts.

Update 4/17/2015: Vanguard and Betterment are going strong. Wealthfront continues to crawl. Betterment and Vanguard end-of-day balances are more or less same. But, we will find out at the end of the month how the two accounts fare. Vanguard has no fee, whereas, Betterment has a 0.25 % fee.

I am thinking of closing the Wealthfront account earlier and moving the funds to Betterment and Vanguard.

Update 4/25/2015: Betterment and Vanguard continue to kick ass. Wealthfront caught up big time in 90/10 portfolio, but continues to suck in 80/20. Tells you about their insistence on smart stock selection.

Update 4/27/2015: Minor situation — While migrating the site, we lost last 10 days of data. I will continue this experiment with the numbers from the end of day today. The experiment will end of on 5/10/2015 as planned.

Update 4/28/2015: Observation — When the stock market does well, Betterment 90/10 wins, and right behind is Vanguard 90/10, but by a small margin. When the stock market does “OK”, Vanguard does better than Betterment. The stock market hasn’t done badly since I began the test, so it’s difficult to tell how the three services do when the stock market is not on their side.

I have observed this pattern only two times since I began the test. If it holds true in the future also, that would mean that Vanguard (90/10 and 80/20) can sustain stock market downs better, while doing well (just an inch behind Betterment 90/10) during stock

Update 4/29/2015: My theory was incorrect. The stock market was rough today, but Betterment managed to yield higher returns than Vanguard.

Update 4/30/2015: Today was a bad day for stocks. Betterment maintained its lead; they are doing something right.

Update 5/1/2015: Stock downfall continues as evident in US & European markets down. Betterment continues to take the lead, and I am leaning towards it.

Update 5/14/2015: The experiment is over. The decision has been made.

Observations:

– Noticed that no matter how the stock market does, 90/10 always does better than 80/20. Maybe the story would be different if I compared 90/10 with, say, 60 stocks and 40 bonds account. But as it relates to this experiment, 90/10 trumps over 80/20 and I am closing all 80/20 accounts and moving the funds to 90/10 account. I will continue the test for another week with 20k in each 90/10 account and then close two of the accounts. So far it looks like all my money will be going to Betterment.

Closing all my 80/20 accounts.

Update 5/23/2015:

– Closed all my 80/20 accounts. The stock market is doing well these days, so I can afford to keep all my money in “90 stocks/10 bonds” split.

– Closed my Wealthfront account. So now my money is split equally between Betterment and Vanguard as their returns are nearly identical. Betterment does seem to have an edge on most days, but that edge is offset by the 0.25% fee it charges. Note that Vanguard waives the maintenance fee if you sign up for their paperless statements, i.e. Statements delivered through emails only — but, if you are reading this post, that’s what you should be doing anyway whether or not they waive the fees.

 

betterment wealthfront vanguard

Update 8/3/2015:

Quick update on 90/10 accounts in Betterment and Vanguard — I had already closed Wealthfront. I have $30k in each Betterment and Vanguard.

The stock market has been acting poorly. Both Betterment and Vanguard have taken a good hit, but overall Vanguard has been outperforming Betterment.

To give you an idea, $30k that I started with on June 1 is not $29,184 in Betterment and $29,491 in Vanguard. Once the stock market catches up and I recover my money in Betterment, I am moving it all to Vanguard.

So, eventually, Vanguard 90/10 is the winner for me.

Based on the stock market performance, I should have changed my accounts to 70/30 — that would have been the smart thing to do, but I am not smart. I rather kept waiting for the stock market to pick up. If it doesn’t pick up this week, I will make, at least the Betterment account, 70/30. I love these experiments, but I love my money more.