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Computerized Investing > October 6, 2012


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by CI Staff

Wealthfront is an online, SEC-registered, investment adviser that provides its customers with a personalized and diversified investment portfolio that is monitored regularly and rebalanced periodically. However, Wealthfront pays no attention to security selection, but rather focuses on asset allocation because the company’s methodology is based on the modern portfolio theory. In other words, Wealthfront first analyzes an individual’s risk tolerance and current situation; then it uses that risk score to calculate optimal asset allocation; and lastly, it recommends the best exchange-traded funds (ETFs) for the portfolio. The best ETFs tend to be those with the lowest annual expense ratios, minimal tracking error and sufficient liquidity.

Unfortunately for Wealthfront, any practical investor should be able to replicate their service for free and with minimal effort, especially given the free questionnaire they provide. On Wealthfront’s home page, you can begin personalizing your investment mix by specifying the account type, amount to invest, your age and selecting the orange “Personalize It” button. You will then be asked to answer 10 questions that fine-tune your risk profile. Finally, you are presented with what Wealthfront believes is your optimal portfolio. Your optimal portfolio comprises six ETFs, each belonging to a separate asset class, which are weighed based on your risk tolerance. A younger investor with a high risk tolerance would allocate a large portion of his capital to U.S. stocks and emerging markets, whereas an experienced, risk-averse investor would allocate most of his capital to bonds.

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