Malkiel Preps Wealthfront For Bond Bust

March 05, 2013

Malkiel gets Wealthfront’s ‘algo’ braced for a bond market meltdown.

Wealthfront, the algorithmically driven advisor that hired passive investment legend Burton Malkiel as chief investment officer three months ago, today added five additional asset classes to its allocation schemes, all aimed at enhancing income at a time when the bond market looks vulnerable.

The five new asset classes are municipal bonds, corporate bonds, emerging market bonds, dividend growth stocks and Treasury inflation-protected securities, according to a blogpost by Malkiel that was posted on Wealthfront’s website.

"Given the historically low yields in the bond market, we wanted to diversify away from predominantly U.S. treasury bonds and agency bonds," Malkiel, also a Princeton University economics professor emeritus, wrote in his blog, saying the bull market in bonds that began more than 30 years ago during President Ronald Reagan’s first term is by now quite long in the tooth.

“No other asset class came close to Treasurys in terms of high returns and low risk over this time period,” Malkiel wrote, noting that Treasury bonds have averaged 10 percent annual returns in the 1982 to 2012 period, with minimal volatility. “That run appears to be over for now,” he said, pointing out that yield on T-bonds dropped from as high as 15 percent to 2 percent now over the 30-year period.

Wealthfront’s radical business aims to replace human advisors with computer algorithms that enforce the verities of responsible investing as a matter of course, including portfolio diversification, rebalancing, minimizing taxes and, not least, limiting fees.

“Software can handle routine tasks like rebalancing automatically, and the complexity required to implement continuous tax-loss harvesting, without adding a lot of cost. Software also takes the emotion out of investing,” Malkiel wrote in his blog.

Wealthfront, which is based in Silicon Valley and aims to prospect tech-savvy clients in its immediate vicinity, doesn’t charge a management fee for the first $10,000 under management, after which an annual advisory fee of 0.25 percent kicks in, or $25 for each $10,000 invested.

Additionally, the firm hews to ultra-cheap exchange-traded funds and aims to deliver a blended expense ratio in any allocation plan of 0.14 percent.

That means if you invested more than $10,000, you’d be paying just 0.39 percent in fees—a truly inexpensive proposition by just about any measure.

Malkiel became famous with the 1973 publication of his now-classic work on passive and index investing, "A Random Walk Down Wall Street." The 10th edition of the book was published in 2011.



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