Forum Mailbag: Trump, Betterment, Financial Advice in Two Words, and More!

There is so much great information on personal finance forums. I regularly participate on several message boards, including Bogleheads, White Coat Investor, Mr. Money Mustache, Rockstar Finance, and Reddit. This is a roundup of my favorite discussions happening around the internet.

1. Mr. Money Mustache: Changing Portfolio in the Trump Era

Question: HenryDavid from Canada is concerned that the new Trump administration will have a negative effect on global stock markets. He cites many of the common concerns and uncertainties associated with his presidency. He wonders whether he should move to a more conservative portfolio for the next four years.

WSP’s Take: These concerns are certainly valid, and if the stock market falls during the Trump administration, many people will feel that they could have predicted the decline. Future Proof MD also addressed the option of sitting out the next 4-8 years in a recent blog post. The problem is that many of these same concerns were raised prior to the election. It was the market consensus that the stock market would fall if Trump won. Indeed, the stock market fell precipitously on the evening of his election victory. However, in the subsequent two months, the stock market has rallied to new highs, with the assumption that a Donald Trump/Republican administration would adopt pro-business policies.

Which of these scenarios will prevail in the next four years? No one knows, and I argue that you should stay the course and avoid reading the market headlines.

2. White Coat Investor: Active vs. Passive Investing

Question: CM questions the prevailing financial wisdom that individual investors cannot be successful stock pickers. He argues that individual investors have some structural advantages over mutual funds and hedge funds. Specifically, individual investors have a small portfolio to manage, opportunities to invest in a tax-efficient manner, and no obligation to answer to clients who might demand short-term performance. He believes that an investor who puts in the work will be able to achieve long-term above-market returns.

WSP’s Take: CM and I had a fruitful back-and-forth discussion regarding the pros and cons of active investing. CM is not your average individual investor, having obtained an MBA and CFA designation. If there were any physician investor who could beat the market, it would be him. However, the data remains that the vast majority of mutual funds underperform the market. Many of these mutual funds have managers with backgrounds similar to CM’s.

We agreed that the typical physician investor should not attempt to beat the market with active investing, as they do not have the knowledge or resources to do so. There are many reasons why you shouldn’t trade, but if you are going to try, I would recommend following these five rules.

3. Bogleheads: Betterment raises fees

Question: CFR received an email earlier this week from Betterment, one of the leading robo–advisors, that they were increasing fees from 0.15% to 0.25% on portfolios larger than $100,000. This has led to consternation among Betterment clients, with discussions on Bogleheads, Reddit, and elsewhere. 

WSP’s Take: Betterment pioneered the robo-advisor concept, but it has spawned many competitors, from startups like Wealthfront and Personal Capital to major brokerage houses like Fidelity, Vanguard, and Schwab. The robo-advisor model is wonderful for the individual investor who wants many of the benefits of a financial advisor at a reduced cost. When choosing among equally good alternatives, I favor the cheaper option, which before this move, was Betterment. However, with the new rate increase, Betterment now charges fees similar to their competitors.

From a short-term business perspective, this rate increase will be beneficial to Betterment, as the 60% rate increase won’t be fully be offset by investor withdrawals.  However, robo-advising is a commodity, and commoditized products usually do not go up in price. Over time, robo-advisor fees will decline, just like expense ratios for index funds. There are many long-term challenges for Betterment and the other robo-advisor startups, which unfortunately this rate increase does not solve.

4. White Coat Investor: Trump Tax Plan

Question: White Coat Investor is excited about Trump’s proposed tax plan, which was summarized by Michael Zhuang. WCI felt that the tax plan would be beneficial to physicians and other high-income professionals, but he wanted to get the community’s opinion.

WSP’s Take: While many of the features of President Trump’s tax plan appear to be favorable to high income professionals such as physicians, the final tax plan will have many differences with this initial proposal. House Republicans have a competing a tax proposal, and the Democrats will certainly wants concessions that fits their policy goals. This is Donald Trump’s opening offer of an extended negotiation. I would not spend too much time studying the details of this early offer. Let’s wait and see until the final tax bill is signed. At that time, we can analyze the tax bill at length and see how it affects our finances, and adjust accordingly.

5. Reddit: 100% Stocks in Accumulation Phase  

Question: NotMyFriends on Reddit observes that a portfolio of 100% stocks has a higher expected return than any portfolio that contains bonds. He asks whether investors in the accumulation phase of their lives should invest in 100% on stocks in order to maximize their return.

WSP’s Take: The reader makes an astute observation. A 100% stock portfolio does have a higher expected return then any portfolio containing bonds. However, the 100% stock portfolio also has the highest risk. Therefore, the physician investor needs to understand their risk tolerance. A young investor may have enough risk appetite to warrant investing in 100% stocks. In fact, they could even consider tilting their portfolio towards small cap or value stocks, which potentially provide higher returns with additional risk.

However, I believe that in the current market conditions, most investors overestimate their risk tolerance. It’s easy to be overconfident in a bull market. Even on Bogleheads, you see more and more threads discussing whether a 100% stock portfolio is appropriate. Many young investors have never seen a significant market decline, and they may regret their 100% stock portfolio with a tilt towards small cap value when the stock market falls.

6. Rockstar Finance: Best Advice in Two Words

Question: WealthWellDone asks the community to give their best financial advice in just two words.

WSP’s Take: This is a wonderful topic, because it forces us to distill personal finance into short slogans or catchphrases that can be appreciated by everyone. There were many excellent responses from other bloggers, including “Start now” by Dads, Dollars, and Debts, “One wife” by The Happy Philosopher, and “Be present” by The First Habit. I chose “Spend < Earn”, which may be considered more than two words by some. However, this is the most fundamental principle of personal finance. Without a positive savings rate, it becomes impossible to achieve your financial goals.

What do you think? Do you agree or disagree with any of my responses? What’s your take on the topics in this week’s forum mailbag?