Wealthfront’s CEO Says This is the Smartest Way to Invest $50K

These questions originally appeared on Quorathe knowledge sharing network where compelling questions are answered by people with unique insights.

Answers by Adam Nash, CEO of Wealthfront, on Quora.

Q: In the current market situation, what would you recommend doing with cash on the order of $50,000?

Let me start out by saying that everyone’s financial situation is different, so frankly, the real world answer realistically could vary a lot.

However, in general, at Wealthfront we strongly advocate that the first priority for individuals to be healthy financially is to make sure that they pay off expensive debt, spend less than they make, and build up an emergency fund of 3-6 months of expenses before they approach long term investment. An emergency fund should be allocated to an FDIC insured savings account – it is not there to make you money, it is there to protect your long term investments from short-term, unexpected expenses.

Assuming that is taken care of, Wealthfront recommends investing the money into a low cost, tax efficient, fully diversified portfolio. The DALBAR research clearly shows that individual investors dramatically underperform the markets, largely for two reasons. They pay too much in fees and they make behavioral errors with their investments. Marketing timing is the number one behavioral mistake investors make – they think too much about “the current market situation”. Markets go up, and markets go down. The benefit of a long term, passive investment strategy is that you can automate your savings and investment and ignore the emotional day-to-day movements of the market. The best thing you can do is expose yourself to the power of compounding, keep fees low, stay diversified and be smart about taxes.

Q: Why should I put my money into Wealthfront and not Betterment or another online advisor?

I think the reasons that our clients choose us over others in the space are pretty straightforward. For investors just starting out, Wealthfront offers the highest quality service at the lowest cost. For investors with larger accounts, we offer investment value that no one else can match.

Wealthfront’s service charges no management fee for accounts under $10,000, with no gimmicks like requiring a scheduled deposit and no monthly service fees. (Fees like these can really add up for small accounts!). For accounts over $10,000 we charge just a simple, flat rate of 0.25%, a fraction of what the traditional industry charges. No commissions or trading fees. Just one simple price.

Our pricing structure in general is different than the traditional industry, but it is done with a purpose. Too many financial firms make too much of their money from the people who can least afford it, and then perversely give their best prices to their wealthiest clients. Wealthfront is not that type of company.

For larger accounts, Wealthfront offers services like Direct Indexing, which deliver exceptional value for investors as their accounts grow. When you turn on our Direct Indexing service in your account, we are able to buy the securities that make up the index directly vs. buying an index fund. Buying the securities directly allows us to harvest losses on an even greater scale than our Daily Tax Loss Harvesting service. We detail the service in our white paper here for those who would like to learn more. As your investments grow, minimizing unnecessary investment taxes is an increasing challenge, and Wealthfront offers the most tax-efficient and tax-optimized service.

In my experience, there is another reason many people choose Wealthfront: the team. When potential clients look at Wealthfront, they see world-class financial talent, like our CIO Dr. Burton Malkiel, the famed Princeton economist who wrote “A Random Walk Down Wall Street” and they see a team of executives who helped build companies like Facebook & LinkedIn. You won’t find a team that looks like this at any other company in the space.

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