Our investment research team is constantly looking for ways to improve your model portfolios that deliver the highest possible expected return for a given level of risk. Today, we are excited to introduce to you an update to your portfolio that will provide you with more diversification and greater tax efficiency.
Our team developed investment models which expand the number of investable asset classes. We can now execute broader, more diversified portfolio management without incurring transactions costs.
Here are the changes that are happening on October 29, 2015:
- We are introducing portfolios especially designed to address tax differences between individual taxable accounts and tax-advantaged retirement accounts.
- We are breaking fixed income into more categories—from two to five, though not necessarily increasing the total percentage allocated to fixed income.
Note: Municipal bonds are relevant only to taxable accounts, and will therefore not be implemented for tax-sheltered accounts.
- We are dropping real estate from the taxable accounts while keeping real estate exposure in your tax-sheltered account, so your tax impact is kept to a minimum.
- We added features such as multiple allocations, so different accounts can be managed to different levels of risk.
How is this beneficial for you?
A broader, more diversified portfolio is a big win. The impact of additional asset classes has wide-reaching implications for our portfolio construction. When new asset classes are included in the traditional mean-variance optimization model, their inclusion often means we can create lower-risk portfolios without losing any expected performance. Some asset classes have superior volatility and return tradeoffs, while others may exhibit worthwhile inclusion in portfolios because of correlation effects with other holdings.
With these changes, we can deliver higher expected returns to our clients by allocating portfolios sensitive to the tax impacts of the underlying holdings. For example, some asset classes, such as real estate, tend to produce higher tax liabilities than long-term stock holdings and offer better after-tax returns in retirement accounts than individual brokerage accounts.
Our investment analysis expects that over the long term, these modifications could produce additional annual returns ranging from 0.5% to 1.0%. Over a 20-year investment horizon, that could mean an additional 29% to 60% in total return.
How does this impact your portfolio?
SigFig will begin transitioning Managed Account clients automatically into this new portfolio, starting on October 29, 2015. If you prefer your current allocations, we can continue managing your portfolio accordingly. You must contact SigFig client support to do so at (855) 9-SIGFIG or firstname.lastname@example.org.
In practice, the transition from our existing allocations to the new portfolios means a couple things for our investment team and our customers. First, we’ll conduct a tax-sensitive rebalancing of your portfolio. We will sell ETFs in the asset classes that we plan to replace or adjust, and we will buy commission-free ETFs in the new asset classes with the goal of improving your portfolio’s performance.
In tax-advantaged accounts like IRAs, there are no tax impacts with this rebalancing. Our team will execute the transition to the new allocations. After all, we want to make sure that you have as much of your hard-earned investment dollars working for you.
In taxable individual and joint accounts, we strive to minimize tax impacts. Generally, we’ll be able to liquidate strategically in holdings to avoid a net capital gain. It is possible that the realized capital gains of some ETFs offset the realized losses of others.
Terry Banet is SigFig’s Chief Investment Officer. With over 25 years of investment experience, Terry has held senior investment management and private banking positions at JPMorgan and USTrust.