Wealthfront Risk Parity???

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nasrullah
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Wealthfront Risk Parity???

Post by nasrullah » Thu Feb 22, 2018 6:35 pm

"We have a lot to do, and very little time, so we must work slowly." Liviu Ciulei | | Thanks vineviz (https://www.bogleheads.org/forum/memberlist.php?mode=viewprofile&u=134698) for the quote.

RamblinDoc
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Re: Wealthfront Risk Parity???

Post by RamblinDoc » Thu Feb 22, 2018 6:47 pm

nasrullah wrote:
Thu Feb 22, 2018 6:35 pm
Looks like my timing to leave was perfect:

https://www.prnewswire.com/news-release ... 02673.html

https://blog.wealthfront.com/risk-parity/
I left last week - didn’t like having everything scattered into lots of fractional ETFs. This news makes me happy with my decision to leave.

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nisiprius
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Re: Wealthfront Risk Parity???

Post by nisiprius » Thu Feb 22, 2018 10:07 pm

Wealthfront says "The empirical underpinning for Risk Parity has existed in academic literature since the 1970s." They go on quote Burton Malkiel, "Chief Investment Officer, Ph.D." as they describe him ,as saying:
Imagine you’re at a horse racing track. There are long-shot horses (considered by most to be unlikely to win, but with the largest winning payout), horses that are middle of the pack, and favorites (considered most likely to win, but with smaller winning payouts). What is your optimal betting strategy? Sure, the significant payoff of the long-shots is enticing enough to lure some into throwing their money at them, but a more prudent bet is the favorite. Why? Well, it turns out that over time if you consistently bet the long-shots you lose 40% the amount of your bet to pay taxes and operational expenses since the track takes 20% of each bet. However, over time, if you stuck with betting the favorites, you’d only lose about 5% of your bet over time. Risk Parity aims to give you the probability of the favorites with potentially the larger payoff of the long-shot.
Actually, I don't understand that. Do you understand that? Well, never mind, that wasn't the point.

My point is: if Burton Malkiel thinks risk parity is a good idea, and if it's been around since the 1970s, why didn't he mention it anywhere in the 2016 edition of A Random Walk Down Wall Street?

(blink) (blink) I really don't understand his horse racing analogy. I really don't.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

Captain kangaroo
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Re: Wealthfront Risk Parity???

Post by Captain kangaroo » Thu Feb 22, 2018 10:16 pm

I don't want my broker comparing my investments to a horse race.

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nisiprius
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Re: Wealthfront Risk Parity???

Post by nisiprius » Thu Feb 22, 2018 10:21 pm

I don't want my broker comparing my investments to a situation where I "only" lose 5% instead of 40%.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

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whodidntante
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Re: Wealthfront Risk Parity???

Post by whodidntante » Thu Feb 22, 2018 10:25 pm

Why don't they buy the AQR fund, or partner with Bridgewater? If I follow the money, I may be able to figure this out.

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nisiprius
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Re: Wealthfront Risk Parity???

Post by nisiprius » Thu Feb 22, 2018 10:46 pm

I think I may have missed nasrullah's joke about his timing, seeing as I don't follow this stuff. The AQR Risk Parity Fund, AQRIX, recently dropped about 9% in about eight or nine days, and from web searches I take it that risk parity in general has been having a fairly bad time recently.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

wootwoot
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Re: Wealthfront Risk Parity???

Post by wootwoot » Fri Feb 23, 2018 12:50 am

You realize this is an optional feature right? I'll gladly keep my taxable account in Wealthfront. The TLH value added during the correction will definitely help on this years taxes.

Archimedes
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Re: Wealthfront Risk Parity???

Post by Archimedes » Fri Mar 09, 2018 8:27 am

Risk parity sounds very risky, has tax consequences that appear to be a big negative, and is investing in derivatives and other highly speculative vehicles. Plus the strategy is pretty close to incomprehensible. No thank you.

I used to like wealthfront for vetting the highest quality, lowest cost etf's, for managing asset allocation, for automatically rebalancing, and for doing tax loss harvesting. But now my opinion of them has totally tanked.

Risk parity may be optional, but it changes my entire perception of wealthfront as a company.

lazydavid
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Re: Wealthfront Risk Parity???

Post by lazydavid » Fri Mar 09, 2018 9:20 am

Archimedes wrote:
Fri Mar 09, 2018 8:27 am
Risk parity may be optional, but it changes my entire perception of wealthfront as a company.
This. I've opted out of Risk Parity (I think you had until yesterday or today to do so), but I look at the introduction of this product and their heavy push for it as signaling a change in investment philosophy that is sharply at odds with my own. I haven't decided to leave yet, but am very seriously considering it.

High fees (not clear if the 0.50% is on top of the 0.25% management fee, or replaces it), active management, extensive use of highly-volatile derivatives and leverage, frequent trading with annual turnover expected to exceed 100%, average of 200% risk exposure to held assets that will be significantly higher at times--those are NOT the things I signed up with Wealthfront for, and not what I thought they were about. But every single one of them is in the prospectus.

lack_ey
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Re: Wealthfront Risk Parity???

Post by lack_ey » Fri Mar 09, 2018 12:28 pm

lazydavid wrote:
Fri Mar 09, 2018 9:20 am
Archimedes wrote:
Fri Mar 09, 2018 8:27 am
Risk parity may be optional, but it changes my entire perception of wealthfront as a company.
This. I've opted out of Risk Parity (I think you had until yesterday or today to do so), but I look at the introduction of this product and their heavy push for it as signaling a change in investment philosophy that is sharply at odds with my own. I haven't decided to leave yet, but am very seriously considering it.

High fees (not clear if the 0.50% is on top of the 0.25% management fee, or replaces it), active management, extensive use of highly-volatile derivatives and leverage, frequent trading with annual turnover expected to exceed 100%, average of 200% risk exposure to held assets that will be significantly higher at times--those are NOT the things I signed up with Wealthfront for, and not what I thought they were about. But every single one of them is in the prospectus.
Methinks you're kind of double-counting a bit in that list. Derivatives are volatile in the sense that the magnitude of return relative to collateral posted is high. For some, the return relative to the notional underlying is volatile; for some other things, very much not so. In any case, this is already encapsulated in the level of risk exposure you quoted (average of 200%). The derivatives are what is facilitating the leverage of what's a relatively bond-heavy balanced stock/bond allocation. They're primarily using a total return swap, basically just entering an arrangement with a megabank to pay them the return on the portfolio of ETFs they specify (minus effective cash/borrowing rate and minus a small fee for the bank's profit), of course with the payment going from the fund to the bank when the return is negative.

To be honest, because it's only a modest piece of the allocation, if used it's really not going to do much. If your asset allocation is broad stock and bond funds leveraged up to 1.2x overall, nothing special is really going to happen, either good or bad.

But I certainly imagine that many like you were not signing up for this type of product or level of fees.

lorneabramson
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Re: Wealthfront Risk Parity???

Post by lorneabramson » Tue Mar 20, 2018 5:49 pm

Relevant and timely article about the changes at Wealthfront (risk parity fund, etc):

https://www.wired.com/story/beware-robo ... etterment/

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nisiprius
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Re: Wealthfront Risk Parity???

Post by nisiprius » Tue Mar 20, 2018 6:46 pm

Incidentally, this does play into my feeling that Wealthfront is a leopard that has changed its spots an awful lot of times.

First, in 2008, it was Ka-Ching!; NYT headline, "Site Lets Investors See and Copy Experts’ Trades."

Then the same thing, but with an emphasis on experts that supposedly were similar to those of college endowment funds (see Rachleff's article, "Bogle Didn't Have All the Data.")

Then in 2010 it metamorphosized into Wealthfront, which at first was going to put you into a fairly generic and Bogleheadish portfolio of low-cost ETFs, chosen in response to your answers to about ten risk-tolerance questions (one of which was whether you'd ever done any "angel investing.) At that time, they were strongly emphasizing the idea that the firm was being run by Silicon Valley techies to serve Silicon Valley techies, or something like that. They had a kind of yearbook-picture screen of a hundred or so investors using the service, mostly techies.

Then they hired Burton Malkiel to be Chief Investment Officer, and the ETF portfolios split into different taxable and tax-advantaged choices and got tuned a little bit.

Then, a couple of years ago, although Malkiel continued and continues to be Chief Investment Officer, it felt as if something had somehow changed. They began to offer "direct indexing" and started emphasizing tax-loss harvesting as being a key benefit of their service.

And now this "Risk Parity" thing.

So that's about six changes in style in less than a decade. Seems like a lot.

P.S. Has anyone got a link to any video where company officials from Wealthfront say the company's name? I keep wondering; it's almost unpronouncable, aloud, to me. Four consonants in a row, that "thfr," it's like trying to say "Joe Btfsplk" or "Mihaly Csikszentmihalyi" or "Cwmystwyth." Do they really say it, or do they just say "Wellfront" or "Wealthrunt?"
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

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