At FutureAdvisor, we believe that long term, fully diversified investing provides the best results over time. When you combine that with the diligent algorithmic monitoring that auto-rebalances your accounts, identifies tax-saving opportunities daily and manages all your multiple accounts, instead of just one, it’s a service that’s hard to beat.
Our Investment Algorithm
Our methodology has two components, an asset allocation strategy that determines your optimal target asset allocation and a portfolio management algorithm that handles the day-to-day work of keeping your portfolio allocation close to your optimal target. Your target asset allocation is computed using several inputs and assumptions including FutureAdvisor’s asset class universe, your investment horizon (e.g. years to retirement) and your personal risk preferences. The portfolio management algorithm analyzes your portfolio daily to determine how to invest new cash deposits, rebalance your portfolio*, or harvest losses for purposes of tax reduction.
Our portfolio recommendations are based on your information. Here’s why:
Our asset allocation strategy incorporates Modern Portfolio Theory, which suggests that investors should build portfolios that are as well diversified as possible among assets expected to provide positive long term return. Diversification happens at two levels: within each asset class and between the asset classes. Both kinds of diversification are necessary to hold an efficient portfolio.
There is no single right answer for how much risk you should take. There are many well-diversified portfolios, each with its own different risk-reward tradeoff. Our recommended risk level is based on your risk tolerance and our investment team’s views on how to best save for retirement.
Our management algorithm is a mathematical optimization engine that decides daily if trading is beneficial to your portfolio. It weighs the need for rebalancing against transaction fees, capital gains taxes, and other costs.
A portfolio usually drifts from its target allocation over time and periodic rebalancing is required to keep it on target. For example, if stocks outperform bonds, an on-target 50/50 stock/bond portfolio could become a 60/40 portfolio, deviating from the target allocation and risk level. Keeping your portfolio balanced is a major factor in our algorithm’s decision-making process.
In most cases, our portfolio rebalancing algorithm is designed to limit realized short-term capital gains to the greater of $200 or 5% of the position value. Exceptions may be made in certain circumstances, including liquidating a position to avoid fund fees or future transaction costs, and in order to meet cash targets such as strategic cash allocations or client instructions to hold or increase cash. With respect to long-term gains, the service will balance a variety of factors within the portfolio to determine optimal treatment, considering your years to goal, portfolio size, cash needs, and the potential diversification impact of a given set of transactions. Rebalancing a portfolio may cause investors to incur tax liabilities. References to tax strategies that FutureAdvisor considers in managing accounts should not be confused with tax advice. FutureAdvisor does not provide tax advice. Clients should consult with their personal tax advisors regarding the tax consequences of investing.
Tax-loss harvesting is an investment technique that helps save you money by deferring taxes – sometimes indefinitely. If the value of one of your investments falls, in a market downturn for example, FutureAdvisor can sell the position to realize the loss, and use it to offset taxable gains elsewhere in your portfolio. Such sales are known as “loss harvesting,” and because they are performed with regard to taxes, the entire technique is called “tax-loss harvesting.” Our algorithm will prevent wash sales that invalidate the tax loss^, and we do not require a minimum balance for this service.
This technique helps decrease your overall tax bill, and helps you preserve your wealth even when the markets drop. FutureAdvisor has fine-tuned its tax-loss harvesting algorithms to make them useful for accounts as small as $20,000. We do not impose an artificial minimum for this service, and we plan to apply tax-loss harvesting to even smaller accounts in the future.
Our algorithm also considers:
*Due to the nature of the financial markets, portfolios will drift from their targets over time, we will rebalance them towards the target allocation periodically.
^Wash sales can still occur due to trades outside your FutureAdvisor-managed accounts.
^^These fees depend on the custodian and product.