Tuesday, December 10, 2013

The Only Reason to Buy Individual Stocks

I recently wrote about why I no longer buy individual stocks. I will now detail my one exception to this rule. If I was working at Google, Facebook, or owned large amounts of those stocks that I couldn't or didn't want to divest myself of (very common in the case of RSUs that aren't vested), then this is what you need to do.

For the rest of your portfolio, when you're buying indices, you can custom construct an index such that those individual stocks are left out. While it only makes sense to do this if your portfolio exceeds a certain amount, the net result is that your overall portfolio is better balanced because you don't have to own Google again, for instance, both in the index and in individual holdings.

What's the portfolio level at which this makes sense? At one point, the only solution was Parametric Portfolio Associates, at a minimum of $5M. However, today, Wealthfront has dramatically lowered the entry level to $500,000. Once you've got such a custom index built, as Wealthfront has detailed, you can now do tax-loss harvesting at an individual level, bringing your tax loss harvesting potential up even further. This is a huge incentive for high networth individuals to use Wealthfront, as their fees are substantially lower than Parametric's, for instance. In fact, once you build a custom index, you no longer have to pay Vanguard's management fee, for instance, so Wealthfront's equivalent portfolio costs come close to Vanguard, and the additional tax-loss harvesting delta will tip the edge in Wealthfront's favor.

In How to Interview a Financial Advisor, I explain why most Googlers who were offered the opportunity turned down Parametric's offer. The problem is that if you fire Parametric, now you're stuck with a portfolio of 499 individuals stocks, and now you have to either manage that portfolio yourself, or find someone willing to do it for you. As you can imagine, unless you're about to write your own software to do this, that effectively makes Parametric/Wealthfront a roach motel, where you can always check in, but you can never leave.

When I spoke with Wealthfront about this latest feature, I proposed a solution to this issue. It's very much technically feasible, and I look forward to seeing if Wealthfront will implement it. The nice thing about being a Silicon Valley startup is that they can move forward far faster than the stodgy banks on Wall Street used to big fat margins.

As for myself? I will continue to move more assets over to Wealthfront as they free up elsewhere. The additional bonuses from what they're doing at higher asset levels is just too much even for this DIYer to pass up.

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