Tactics for the Lazy Investor: A Native Guide to Investing

Steve Russell

So, you know you need to save if you ever hope to retire. You’ve decided that the only place to get an adequate return on your money without the degree of personal involvement in starting your own business or flipping houses or restoring classic cars or whatever is to take a ride on Wall Street. You consider ETF’s the safest way to diversify a small portfolio, but you don’t want to fool with picking them yourself.

Some young Silicon Valley types are creating outfits that can help you because I just described the attitude toward investment held by a lot of… young Silicon Valley types.

Remember that when you are a small player, you must minimize your transaction costs. In an earlier installment of this series, I told you where you could buy a few blue chip stocks with no commission and any stock traded on a major exchange for a very small commission if you don’t mind market orders.

Sharebuilder goes a step further in that they have an app that will design a basket of ETFs geared to your risk tolerance and allow you to buy fractional shares in that basket, just as you could buy fractional shares of individual stocks at that brokerage. Unlike their regular accounts, which have no minimum, they require $200 to get started.

Now comes a new breed of investment advisors, riding down Wall Street with proprietary algorithms that will design a basket of ETFs just like Sharebuilder. For a really reasonable fee, they will also rebalance you periodically as the business cycle shifts to favor different sectors, and they even claim to have composed an algorithm to do tax loss harvesting by defeating the “wash sale rule.”

The wash sale rule is not from the SEC, but rather from the IRS. It holds that if you sell a security at a loss, but then you acquire either the same security or one “substantially identical” within 30 days, you lose the right to claim your tax loss. The wash sale rule applies even if you only buy an option on the stock you sold, and it can be violated if your spouse or any entity you control buys the stock back.

Tax loss harvesting requires navigating around the wash sale rule while remaining diversified. I’m telling you that algorithms that purport to accomplish this exist. I’m not telling you they work, because I don’t have personal knowledge of that.

The first of these new investment companies, Betterment, kicks in tax loss harvesting when your portfolio pops over $50,000. That’s going to take a while for the rookies this column is addressing, but if you are young and you keep after it, you will roll over $50,000 several times in a lifetime.

The computer at the Betterment website will want to know your age, your goals, and—we always keep coming back to this—your risk tolerance. Betterment requires no minimum balance to open an account, but if you are depositing less than $100 a month, they charge you a flat fee of $3 a month. There are no commissions on trades, either at the beginning or when they rebalance.

If you are depositing at least $100 a month, their management fee is .35 percent of your average yearly balance, assessed quarterly. That gets lower on a scale until you pop over $100,000, when it goes to .15 percent and stays there.

Notice that the fees get lower as your account gets richer. That’s normal, and you will find that conventional brokerage firms that offer assistance by a human being charge a lot more because, frankly, they don’t want the minnows. They want the whales and they will tolerate the normal fish because some of them will become whales. You will have trouble finding an assisted account at .25 percent up to $100,000

Trade King, which has carved out a market niche catering to minnows in the shark tank by offering commissions on stock trades at $4.95, charges from .5 to 1 percent, depending on the balance. The little fish pay more. Trade King offers five portfolios, with automatic rebalancing labeled from conservative to aggressive. Trade King does not allow you to hold any positions in the account that are not part of the management agreement and they require a $10,000 minimum balance to start. So, you see, “minnow” is a relative term on Wall Street.


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