Digital Wealth

Leverage algorithms to take your investment approach to the next level

Digital Wealth: An Automatic Way to Invest Successfully reveals core investment strategies that you can leverage to build long-term wealth. More than a simple review of traditional investment strategies, this innovative text proffers digital investment techniques that are driven not by people but by algorithms. Supported by asset allocation research, the secrets shared in this forward-thinking book have underpinned cutting-edge investment firms as they integrate algorithm-based strategies. In addition to presenting key concepts, this groundbreaking resource explains how these concepts can give you an edge over the professionals on Wall Street through details regarding achieving financial security and meeting financial goals rooted in a firm foundation in behavioral finance, portfolio tilts, and modern portfolio theory.

Investment strategies have evolved from one generation to the next, and the ability to leverage new digital tools calls for another overhaul of traditional investment concepts. Investment techniques implemented by algorithm rather than by human monitoring can, in some cases, prove more successful. The key to a balanced portfolio is understanding what these algorithm-based strategies are, and how to best use them.

• Explore insights from multiple Nobel Prize winning academics that can give your investment strategy an edge
• Consider how technology can open up powerful techniques to mainstream investors, including tax-loss harvesting and automated rebalancing
• Discuss how cost minimization and a strategic tax approach can boost your portfolio's compound growth
• Identify strategies that support the long-term growth of your wealth

Digital Wealth: An Automatic Way to Invest Successfully is an essential text for sophisticated individual investors and investment consultants alike who want to explore how digital tools can bolster financial success.

Preface xiii

Acknowledgments xvii

Chapter 1 America’s Savings Challenge 1

We Don’t Save Enough 1

The Key Change in America’s Retirement Planning Process 3

How Financial Innovation Helps 4

The Magic of a 15 Percent Savings Rate 5

Notes 8

Chapter 2 The Risk of Not Investing in Stocks 9

The Short‐Term Risks 10

The Historical Perspective 10

The Logic 12

Chapter 3 The Enemies of a Stock Portfolio 15

Why Inflation Matters 16

Treasury Inflation‐Protected Securities (TIPS) 17

Asset Confiscation 18

Recession 19

Chapter 4 The Value of Time for Investors 21

Why Long‐Term Stock Investing Is Less Risky than It May Seem 21

The Long‐Term Picture 22

How Bonds Can Help 24

Note 27

Chapter 5 Core Assets of a Robust Portfolio 29

Asset Classes We Include 29

Individual Asset Classes We Exclude 34

Notes 39

Chapter 6 Dynamic Asset Selection

Determining the Lowest‐Cost Option for Each Portfolio 41

Chapter 7 What Software Does Better than People 47

How Software Helps Investors 49

Example: All the Decisions an Algorithm Makes 50

Chapter 8 How International Investing Can Smooth Returns 53

Demographics Matter 54

Diversification Improves Your Industry Mix 56

Notes 58

Chapter 9 The Advantages of Exchange‐Traded Funds 59

The Benefits of ETFs 61

In‐Kind Transfers 62

The Risks of ETFs 63

Securities Lending Policies 65

Notes 67

Chapter 10 The Triumph of Low‐Cost Investing How Paying Less Gets You More 69

Fooled by Randomness 70

A Triumph of Marketing over Results 72

Notes 76

Chapter 11 Learning from Nobel Prize Winners 79

Milton Friedman, 1976 80

James Tobin, 1981 81

Harry Markowitz, 1990 81

William Sharpe, 1990 82

Daniel Kahnemann, 2002 83

Eugene Fama and Robert Shiller, 2013 83

Chapter 12 The Costs of Being Active 85

The Cost of Closet Indexing 87

The Other Costs of Active Management 88

Notes 90

Chapter 13 The Greatest Mistakes Made by Novice Investors 91

Starting Saving Too Late 92

Are You Using Tax Shelters Effectively? 93

Are You Taking Advantage of 401(k) Matching If Available? 93

Are You Diversified Internationally? 93

Are You Chasing Returns? 94

Are You Overpaying in Fees? 95

Are You Tracking the Right Index? 95

Do You Trade Too Much? 97

Chapter 14 Tilts and Other Ways to Help Long‐Term Performance 99

History of Market Thought 100

Data Mining 102

Debunking Strong‐Form Market Efficiency 103

Rationality 103

The January Effect 104

Sell in May and Go Away 104

Momentum 105

Value 105

Small Cap 106

Quality 106

Longer‐Term Mean Reversion 107

Assessing Tilts in a Portfolio Context 107

Notes 108

Chapter 15 Establishing a Tax‐Efficient Portfolio 109

Tax Shelters 111

Tax Efficiency for Retirement 111

Tax Efficiency for College 112

Tax Efficiency for Giving 113

Tax‐Efficient Asset Placement 114

Tax Loss Harvesting 115

Offsetting Gains with Losses 115

The Principal of Tax Deferral 116

How Tax Loss Harvesting Works 117

Challenges of Implementing Tax Loss Harvesting 117

Conclusion 119

Chapter 16 The Value of Rebalancing and Glidepaths 121

Rebalancing Keeps a Portfolio on Course 122

Tiered Rebalancing 125

Glidepaths 126

Notes 129

Chapter 17 How to Manage a Market Crash 131

Keep Stock Market Investing for Longer‐Term Money 133

Making Saving an Ongoing Activity 134

Pay Attention to Extremes of Long‐Term Valuation Signals 134

Don’t Consider Stocks in Isolation 135

Remember that You May Underestimate Your Risk Tolerance in Good Markets 136

Chapter 18 Your Own Worst Enemy Is in the Mirror 139

The Biggest Threat to Your Returns Is in the Mirror 140

Always a Reason to Avoid Staying Out 141

The Returns You See Aren’t the Ones You Get after Tax 141

The Media Isn’t Your Friend 142

Overtrading 142

Home Bias 143

Failing to Take a Long‐Term Perspective 143

Availability Bias 144

Chasing Performance 144

Ignoring Fees 144

Holding Too Much Cash 145

How Software Can Help 145

Note 146

Chapter 19 Saving for Goals beyond Retirement 147

Tax Efficiency 148

Portfolio Construction 149

Emergency Funds 150

Investment Flow Chart 150

Chapter 20 A History of Diversified Portfolio Performance 153

Stocks vs. Bonds 153

The Impact of Recessions 154

The Impact of Inflation 155

The Danger of Averages 155

The Benefits of Combination 155

An Emerging Market that Has Emerged 156

Chapter 21 The Future of Wealth Management 157

Lower Costs 158

Democratization of Services 159

Increasing Customer Intimacy 160

Improved Financial Awareness 160

Note 161

Chapter 22 Conclusion 163

Author’s Disclaimer 167

About the Author 169

Index 171

SIMON MOORE is Chief Investment Officer at FutureAdvisor, the award-winning digital asset manager. He has written about finance for Forbes, Huffington Post, and Yahoo! Finance, and is quoted regularly by such major media outlets as CNN and the Wall Street Journal.

If you're serious about growing your wealth, you have probably tried traditional financial advisors, who charge a lot for underwhelming returns, as well as building your own portfolio, which is endlessly time consuming and laborious. Digital Wealth presents the turnkey, low-cost solution for growing your assets with algorithmic accuracy executed at the speed of today's sophisticated digital processors.

Award-winning investment researcher Simon Moore shows you that the secret to growing wealth for the long term comes down to reliable theory, accessing powerful portfolio strategies now available to individual investors, and being smart about your tax obligations. Step by step, he walks you through a revolutionary, simple approach to personal wealth management supported by unprecedented asset-allocation research and automated by powerful algorithms that keep your investment strategy on track with digital precision.

Whether you're new to investing or want to take your financial security to the next level with up-to-date tools, this insightful guide presents inspiring, actionable guidance for blending the theory of Nobel Prize-winning economists with the most sophisticated techniques available to investors. By adapting this investing approach, you can develop a portfolio that:

• Is fully customized to your specific investment goals and time horizon, whether you're saving for retirement, higher education, a first home, or an emergency fund
• Uses automated, threshold-based rebalancing to adapt to market drifts, which is more efficient and safeguards investors against losing money by trading on emotion
• Includes funds best suited for its size based on cost and benefit picked by cutting-edge algorithms capable of monitoring multiple constraints
• Maximizes tax benefits by identifying the proper asset placement and using tax-loss harvesting to improve post-tax returns

Digital Wealth is your entrance into a new world of wealth management that enables investors to trade independently, without high fees and commissions, using professional analytics and automation.

Digital Wealth

If you're serious about growing your wealth, you have probably tried traditional financial advisors, who charge a lot for underwhelming returns, as well as building your own portfolio, which is endlessly time consuming and laborious. Digital Wealth presents the turnkey, low-cost solution for growing your assets with algorithmic accuracy executed at the speed of today's sophisticated digital processors.

Award-winning investment researcher Simon Moore shows you that the secret to growing wealth for the long term comes down to reliable theory, accessing powerful portfolio strategies now available to individual investors, and being smart about your tax obligations. Step by step, he walks you through a revolutionary, simple approach to personal wealth management supported by unprecedented asset-allocation research and automated by powerful algorithms that keep your investment strategy on track with digital precision.

Whether you're new to investing or want to take your financial security to the next level with up-to-date tools, this insightful guide presents inspiring, actionable guidance for blending the theory of Nobel Prize-winning economists with the most sophisticated techniques available to investors. By adapting this investing approach, you can develop a portfolio that:

• Is fully customized to your specific investment goals and time horizon, whether you're saving for retirement, higher education, a first home, or an emergency fund
• Uses automated, threshold-based rebalancing to adapt to market drifts, which is more efficient and safeguards investors against losing money by trading on emotion
• Includes funds best suited for its size based on cost and benefit picked by cutting-edge algorithms capable of monitoring multiple constraints
• Maximizes tax benefits by identifying the proper asset placement and using tax-loss harvesting to improve post-tax returns

Digital Wealth is your entrance into a new world of wealth management that enables investors to trade independently, without high fees and commissions, using professional analytics and automation.