An increasingly-crowded space is the online investment portfolio manager, which promises to help you invest better while costing a fraction of what conventional financial advisors would charge. Here is an incomplete list, including several services that I’ve tried and reviewed:

• MarketRiders Review
• Betterment Review ($25 bonus on $250 deposit)
• SigFig
• Wealthfront
• Jemstep Review
• Personal Capital Review ($10 free to try, no money required)

I support the overall vision and enjoy seeing all the new developents, and I think that many of them show promise. Selfishly, I figured that I’d put up my personal wish list of features as a DIY low-cost investor. Many of the services listed above do one or more of these things, but so far none have done enough to replace my current method of using a manually-updated Google Docs spreadsheet.

Import my existing portfolio automatically. Similar to Mint, I should simply provide my login details and have all my portfolio holdings and activity imported and synchronized automatically on a daily basis. Security is a concern here, and it would be really nice if brokers created a “read-only” access protocal, similar to what Capital One 360 has set up for its savings account. SigFig (formerly WikInvest) does this aggregation part reasonably well for many popular brokers.

Track asset allocation across entire portfolio. Many folks have investments spread across various places – 401k, IRA, SEP-IRA, taxable account, etc. I want to know my overall asset allocation across everything. Stocks vs. Bonds, US vs. International, Large-cap vs. Small-cap, Growth vs. Value, please break it down as fine or as broadly as I’d like. This may take some learning by the software in the case of some niche investments like stable value funds or individual bonds. I’ve seen Personal Capital learn asset classes quickly, so it’s definitely possible.

Customized rebalancing alerts. I want to be able to set my own target asset allocation as well as tolerance bands, and have the software send me an alert when I need to rebalance. They could even tell me “buy $X,XXX of Large-Cap US stocks” or “sell $X,XXX of Corporate Bonds”. This is a critical feature of my Google Docs spreadsheet, as it tells me where to invest new cash inflows. MarketRiders provides rebalancing alerts for a fee, but they don’t import data automatically.

Detailed performance stats vs. benchmarks. Even though I’m mostly a passive investor, my actual performance will still depend on the timing of my investments. I’d like to know my “personal rate of return”, which some brokers like Fidelity and Vanguard are pretty good at showing me. But again, I want to see numbers across my entire portfolio. How does my return compare with various benchmarks?

Reasonable cost. Some services are ad-supported or charge based on asset size, but I would be willing to pay around a flat $100 a year or $10 a month for such a product. That’s not much, but I think all of the above can be done with software and thus should scale easily. 10,000 people paying $100 a year is still $1,000,000 a year. Perhaps a company like Morningstar could offer access as part of their premium service, or it could be licensed to an E-Trade or TD Ameritrade.

What features are you looking for that haven’t been met?

Vanguard’s research department released another study [pdf] comparing ways to increase retirement savings for individuals. Here’s one illustrative example; take the following baseline scenario:

• Investor begins working at 25, but starts saving at age 35.
• 12% savings rate
• Moderate asset allocation (50% stocks and 50% bonds)
• Salary starts at $30,000 but increases with age

Now, here are three ways in which a worker could increase their final savings balance at retirement (age 65).

• Option #1. Invest more aggressively with an asset allocation of 80% stocks and 20% bonds, while keeping your 12% savings rate and starting age of 35.
• Option #2. Raise your savings rate to 15%, while keeping your starting age of 35 and 50/50 asset allocation.
• Option #3. Start saving at age 25 instead of 35. while keeping your 12% savings rate and and 50/50 asset allocation.

Which single option do you think has the most impact? The results are based the median balance found after running Monte Carlo computer simulations based on 10,000 possible future scenarios for each option.

Here’s another chart comparing the median retirement balances (inflation-adjusted) for (1) someone with a 6% savings rate and 80/20 aggressive portfolio and (2) someone with a 9% savings rate and 50/50 moderate portfolio.

(click to enlarge)

The title of the paper is “Penny Saved, Penny Earned”, which matches their suggestion that saving more is more reliably effective as compared to reaching for better investment returns. This information should be helpful for those that would like to avoid stock market stress but worry about giving up those potentially higher returns. If you save more, you can take less risk and sleep better at night while still reaching your goals. Hopefully this will also encourage folks to start saving as early as possible, even it is not an especially high amount.

If you have a 401(k) or other tax-sheltered retirement plan, one of the investment options may be a stable value (SV) fund. In today’s low interest rate environment, stable value funds have been popular as they offer the stable price of a money market fund but with a higher yield. This is due to the fact that they are basically intermediate-term bond funds wrapped in an insurance contract that guarantees it maintains a “stable value”. This means the book value that you see can differ from the actual market value.

In my case, I invest some money in them because they offer a 3% yield on previous contributions (current contributions earn 1.25% on which I passed). Compare that with a money market fund earning 0.01%, or the Vanguard Intermediate Bond fund with a 6.4 year duration and only a 1.78% yield.

However, if interest rates were to rise quickly, this would lower the market value of those bonds (as interest rates go up, bond values go down) at the same time that there may be a rush of redemptions. Would the fund be able to cash people out at the higher book value as promised? A recent Vanguard research paper ran some scenarios based on historical periods of rising interest rates (1986-1990 and 2004-2008). They used Vanguard’s pooled fund, the Vanguard Retirement Savings Trust, with an average duration of underlying investments of ~2.6 years. Read the paper for details, but the overall conclusion was that the stable value funds would survive such scenarios:

Although stable value funds in general have performed well through past market cycles and crises, in the current environment of low interest rates both stable value investors and contract providers have been concerned about the effect rising interest rates would have on the funds and the ability of the funds to continue to perform well when further stressed by cash outflows.

[…] …in our simulations, the funds’ MV/BV ratios demonstrated resiliency, and crediting rates fluctuated within a band far narrower than that of market yields, even in extraordinary scenarios.

While the paper’s findings provide some reassurance, I’m reminded that lots of people “stress tested” mortgage-backed securities in 2007 as well. Based on the Vanguard analysis, here are some additional cautionary steps to take for potential investors in stable value funds:

1. Remember the basics of stable value funds. SV funds are intermediate bonds wrapped in an insurance guarantee, so if the insurance fails then you’re just left with bonds. This isn’t the end of the world, but make sure you’re okay with that. See previous post on stable value funds risks and rewards for real-life examples.
2. Understand your specific withdrawal restrictions. There are usually some form of liquidity restriction attached, but they can vary greatly. In some cases, you have to give a full 12- to 24-month notice to withdraw at book value (guaranteed principal). In my plan, I am not allowed to transfer into any other fixed income (bond) funds at all. I can transfer at any time into a stock fund, but then I have to wait 90 days until I can transfer again to another bond fund. This Reuters article reports that some providers have been cutting back on guarantees.
3. Be aware of scenarios where your stable value fund will be under stress. Usually, this results from rapidly rising interest rates. For example, if the yield on money market funds rise, people will prefer those to stable value funds. Also, the market value of the underlying bonds will fluctuate, even though only the book value is reported on your statements. If the market-to-book ratio on your SV fund drops below 98% (see updated prospectus), people may panic and start to withdraw.

Here’s a mid-year update of our investment portfolio, including employer 401(k) plans, self-employed retirement plans, Traditional and Roth IRAs, and taxable brokerage holdings. Cash reserves (emergency fund), college savings accounts, and day-to-day cash balances are excluded.

Asset Allocation & Holdings

Here is my current actual asset allocation:

The overall target asset allocation remains the same, based on my own preferences and research:
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