3 ways you can invest on autopilot
There are three great ways that you can buy an entire Index Fund portfolio on autopilot. They all have similar playbooks by investing you in diversified funds and keeping your fees low. It’s like when your map app gives you 3 routes with similar ETAs — it mostly comes down to personal preference. We’ve outlined the options below so you can choose which is right for you.
We think that Target-Date Funds, also known as Lifecycle Funds, are the best choice for most people. The main reason is that they typically have no management fees. While the other solutions we recommend are fairly priced compared to most advisors, they still can have fees of tens of thousands of dollars over your lifetime. Why pay that if a Target-Fund Date works just fine for your needs?
With Target-Date Funds, one fund serves as your entire portfolio. It’s designed based on the year you plan to retire — so if you’re 30 years from retirement, you’d choose the 2050 retirement fund. Brokerage firms all design their Target-Date Fund portfolios differently, but a popular one like Vanguard’s bundles together thousands of US & International stocks and bonds.
Target-Date Funds automatically divvy up your investments between stocks and bonds, which is known as Asset Allocation. As you start to age, it starts shifting your allocation from stocks to more stable bonds.
Vanguard Personal Advisor Services
Vanguard Personal Advisor Services is another great option to consider if you’re investing over $50,000 and want to work with a human advisor.
With this option, Vanguard’s advisors will build and manage your portfolio for you and be there to answer your investing questions. They’ll likely recommend a portfolio that’s similar in spirit to what’s inside their Target-Date Funds. Since the advisors aren’t picking stocks the service offers an extremely competitive annual management fee of 0.30%. Other advisors typically charge between 1-2%.
Just be aware that Vanguard is helping clients at scale and you won’t hear much from them unless you proactively reach out. You won’t even have a dedicated Vanguard advisor unless you invest over $500,000 with them. If all that works for you, this service can be a great hands-off option.
Roboadvisors manage your money automatically using a computer. They use the same Index Fund strategy as Target-Date Funds, but can offer more fund selection such as investing in socially responsible funds. After signing up, you simply take a questionnaire and get a personalized recommendation for your portfolio and Asset Allocation.
Roboadvisors like Wealthfront and Betterment have beautiful, intuitive apps that have gotten a lot of people to invest the right way. So we like that about them. But we believe that Target-Date Funds will likely outperform Roboadvisors in the long run since they don’t have the .20%-.30% management fee that many Roboadvisors do. We’re not convinced it’s worth paying this fee for sleek app design which can add up to tens of thousands of dollars over time.
We also feel that if someone is going to pay an annual management fee, Vanguard’s Personal Advisor Services is a better choice for those investing $50k+ since you get access to a human. Some Roboadvisors are starting to offer human advisor services, but usually at a higher cost than Vanguard.
Frequently Asked Questions
don’t see your question? shoot us a line.
I get that fees are bad, but why do they matter so much?
In the same way that your money compounds over time when invested, so do your management fees. If someone with $500,000 pays 1% in management fees for 30 years, they’ll end up paying almost $1,000,000 in fees that could have stayed in their account. We think that’s excessive given that most advisors don’t successfully offset their fees with performance, and why Target-Date Funds are so attractive.
If I don’t use a human advisor, how do I get help when I need it?
We believe people shouldn’t have to go it alone for their overall finances. Especially when navigating complex finance issues like company equity, tax optimization, and family planning. We are pro-human help, our only beef is with costly investment managers trying and usually failing to beat the market on their client’s dime. Fortunately, there are a growing number of Certified Financial Planners who agree and work on an hourly or flat rate basis. A good place to find them is NAPFA.org and you can filter with those fee-model requirements.
What if I want to DIY my own Index Fund portfolio?
Because Index Funds make investing so easy, some people like to just manage their own portfolios with a simple 3-fund portfolio. This type of portfolio invests similarly to the autopilot options above, but you don’t pay management fees and have more control over the parts than with a preset Target-Date Fund. While it can be managed with just a few hours of your time a year, it requires interest and discipline to keep on top of. If you want to learn more you can Google “Bogleheads 3 fund Portfolio.”
The Roboadvisor I’m looking at says that their fees pay for themselves with Tax-Loss Harvesting. Is this true?
We’ve seen this claim, and think it’s somewhat disingenuous marketing. Tax-Loss Harvesting is an investing tactic that exchanges funds in your portfolio with similar funds when there are losses, so you can write them off as a deduction at tax time. Roboadvisors do this for you automatically. While this can work well for newer investments, Roboadvisors know that the market historically goes up over time and that there will be fewer opportunities to do this as your assets grow and you’re getting hit with the most fees. For this reason, we still believe that Target-Date Funds will likely outperform Roboadvisors over the long run.
It’s important to me to only invest in socially responsible companies. How do I do that?
We hear you. The one downside to Index Funds is that by buying everything, you’ll own tiny slices in companies that may have different values than your own. If this is important to you, there are a few ways to address it. The first is by using a Roboadvisor or low-cost human advisor that helps you buy specialized ESG Index Funds that exclude certain companies/sectors. The biggest downside of this approach is that these funds usually have higher fees. The second option, which we think is reasonable, is to use regular Index Funds and make a pledge to invest some of the extra money you’re saving in fees directly to the causes you care about.