As it happens, Betterment’s look-back period started just months before the 2000 tech crash and ran through 2013, providing a huge initial loss, and lots of time to compound any invested tax savings. Wealthfront presented backtested results from a similar time period, along with actuals.
When I asked Betterment for the results of their Monte Carlo simulations that aren’t tied to the 2000-2013 time period, its spokesman demurred, explaining in an email that: “Ultimately, the range of benefits varies tremendously depending on time horizon, and deposit schedule. In the white paper, we chose to focus on real data, but we will publish results based on forward-looking projections as well, and can share at that time.“
In the end, tax-loss harvesting doesn’t have an absolute value, not the way that expense ratios, trading costs or even asset allocation does. There are too many variables involved, many of which are unknowable at the time of the harvest.
Going forward, I would advise that prospective robo investors think carefully about their current and future tax brackets, their time horizons and their volatility expectations. Also weigh the tax-loss-harvest expectations against the opportunity costs of switching to the second-best, non-“substantially identical” ETF.
I can’t resist one final irony.
Wealthfront, Betterment and FutureAdvisor all chose VWO as their primary emerging market ETF, with IEMG as their secondary choice. If I were to invest in either, I’d be happier post-harvest (except for the bit about taking a loss), because, as I wrote blog No. 5 of this series, IEMG is a broader-based, better-run fund.
My happiness would be short-lived at Wealthfront, where they switch back to the primary after waiting out the 30-day wash-sale window, but potentially infinite at Betterment, where they only switch back if there are further losses to be harvested. But let’s not think about that part.
The Bar Mitzvah Boy
As my husband and I wrap up our process of helping our son choose a robo advisor, we will ignore tax-loss harvesting, because our 13-year-old doesn’t owe any taxes, and probably won’t for at least nine years. Moreover, he doesn’t yet need bonds, so most of his assets will be highly correlated, and therefore offer fewer harvesting opportunities.
We’ll counsel him to think hard about the asset allocation bets he wants to make, and the risks they entail, showing him the costs and philosophies of each robo advisor. In my seventh and final blog of this robo advisor series, I’ll let you know what he chooses, or if he decides to go it alone.
At the time this article was written, the author held no positions in the securities mentioned. Contact Elisabeth Kashner, CFA, at [email protected].