Portfolio Management & Mechanics

Can I set up a recurring investment?

Setting up a recurring deposit is a great way to grow your investments without having to think about making additional deposits! To set up a recurring deposit reach out to our team at support@openinvest.com to let us know the amount and frequency you would like, and we will work with you to add your recurring deposit to your account. Once your recurring deposit is set up, our system with automatically transfer your funds from your linked bank account to your investment or retirement account for you, allowing your investments to seamlessly grow over time.

If you ever need to adjust your recurring deposit, just let us know, and we’ll be happy to help!

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Are OpenInvest portfolios active or passive?

Transcript

There are two ways to invest in the stock market; active investing and passive investing. OpenInvest only engages in passive investing and here's why; there's now broad consensus that passive investing is a better way for the vast majority of people to invest resulting in better returns over time. Passive investing maximizes diversification, therefore, minimizing risk while slashing fees and reducing taxes. Meanwhile on the active side despite all the glossy brochures you just have to look at the statistics. Ninety-nine percent of active managers fail to beat the market once you take out their fees. It's because active managers bring in a whole lot of human bias, error, and all kinds of companies specific risks that nobody can predict. Meanwhile, they're charging you much higher fees and those compound over time eating away at performance and potentially costing you hundreds of thousands of dollars over your lifetime.
Now in the past, if you had a special view like you don't want to invest in weapons companies you had to go out and hire an active manager to do it for you, but in return, you're paying those high fees, and you're getting the spotty performance. Fortunately, OpenInvest technology has created a breakthrough. When you sign up for open invest, you answer a few questions about your finances and the things you care about we then create a diversified passive portfolio for you that is fully tailored to your particular values. For the first time in history, it means anyone can be a social activist investor acting on the things that they care about in the world while always having a passive portfolio. You can even divest or invest from individual companies with a swipe, and your portfolio will automatically rebalance to keep you passive and tracking the performance of the market the S&P; 500 specifically. No compromise is necessary it's easy, so if you care about making money let alone the world, it's just a better way to invest.

Passive. We don’t change the allocation mix based on any alpha views, attempting to beat the benchmark, or anything that isn’t simply rebalancing with the goal of tracking the performance of the market.

99% of active managers fail to beat the market, and instead they end up underperforming because of the fees they’ve charged you for their “expertise.” There is broad consensus that generally, investors should hold the market, not try to beat it. As a passive investor, your two primary strategies are diversification and reducing fees.

With OpenInvest, for the first time in history, people can wield their assets as activist investors, while holding a passive portfolio.

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Why is my brokerage account a margin account?

A margin account makes rebalancing your account much more straightforward. Instead of waiting days for the sale of a security to settle and result in cash proceeds, with a margin account you can rebalance all at once. Other than this, we will not trade on margin without your explicit approval.

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What is diversification?

Diversification means holding investments in many different areas to reduce the risk of loss. This could mean different companies (e.g. Microsoft and Apple), companies in different sectors (e.g. manufacturers and health care providers) or entirely different asset classes (e.g. stocks and bonds). For OpenInvest’s purposes, diversification means making sure your investments are properly spread so that even if you make changes, you don’t risk being too much in one company or industry.

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What is the basic structure of my portfolio?

Portfolios are structured as a combination of: A) a basket of equities (stocks) that aim to replicate the performance of the S&P500, but are reflective of your values; and B) a bond fund, which provides diversification. We provide you with the option to use a green or traditional bond fund, creating a blended and diversified portfolio. Furthermore, we will be adding asset classes and expanding the universe of equities in the coming months to provide even further diversification and engagement opportunities.

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How exactly is my portfolio is constructed?

For the equity portion of your portfolio, we start with a universe of securities: currently we use the S&P 500, which we believe is the best way to track the overall performance of the stock market.

Next, we get data on how well companies align with the set of issues that we support and overlay this on the universe of securities. You can read more about the details of this data and the metrics we use on our issues page. Depending on the issue and the metric this could result in a company being labeled as good, bad or neutral for a particular issue.

All of the bad companies, on any issue you care about, are ineligible for your portfolio. We’ll start building a portfolio from the good ones and use neutral companies to balance other factors such as sector diversification, beta and average weighted market cap.

The resulting portfolio will never go below 60 stocks (and is typically many more) and will closely match the characteristics of the original universe.

For the fixed income (bond) side of your portfolio we invest in BND, a diversified bond ETF with a very low expense ratio. We include the ETF expense in our fee so this is not an additional expense. You can elect to use a ‘Green Bond’ fund instead (CGAFX). We leave this up to you, as unfortunately the expense ratio is fairly high (~0.88%) and we have to pass this on.

We rebalance your portfolio automatically (and with no additional fees or expenses) as prices change and you add or subtract funds from your account. We also keep it up to date with the issues you care about. New data on corporate behavior is frequently being released, and we are always evolving our company scoring metrics to better reflect the issues you care about.

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What are Green Bonds?

A green bond is a tax-exempt bond issued by federally qualified organizations or by municipalities for the development of brownfield sites. Brownfield sites are areas of land that are underutilized, have abandoned buildings or are underdeveloped, and often containing low levels of industrial pollution. Green bonds are short for qualified green building and sustainable design project bonds.
Read more: Green Bonds

A bond is effectively a loan which your investment provides that funding for. Bonds are typically issued by corporations looking to expand or by governments funding significant projects such as building a new school or improving roads. These bonds, also known as fixed income securities, are issued for a specific amount or face value, an interest rate which is how much you’ll earn for your investment per year, and a maturity date which is when the loan must be paid back by.

In the case of green bonds, the loan is tax-exempt and is typically issued by municipalities or federally qualified organizations in order to develop areas that are abandoned, underdeveloped, or have low levels of pollution that must be cleaned up. Projects to improve these sites must use qualified green building and sustainable design and are often LEED certified.

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What is the process for withdrawing funds from OpenInvest?

Currently, we handle withdrawals manually (though we’ll be adding automatic withdrawals soon). All you need to do is email support@openinvest.com with how much would you like to withdraw, and whether you would like to withdraw your funds to a linked bank account and we’ll take care of it as fast as possible.

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What happens to my account if something happens to OpenInvest?

Your investments belong to you, and OpenInvest never touches your money. Nothing would happen to them if OpenInvest went public, was acquired, or closed its doors (which we don’t see happening any time soon).

All OpenInvest accounts are held with a clearing firm called Apex, which is an SIPC-insured custodian. They are a market leader who handles billions in assets, including numerous hedge funds. Should something happen to us, your money would simply be sitting there at Apex, and they would be able to manage your account for you, or help you move it somewhere else at your request.

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What Is Tax-Loss Harvesting (Optimized at the Individual Equities Level)?

When you have a portfolio of stocks, naturally some will increase in value and some will lose value over the course of a year. Tax-Loss Harvesting (TLH) is a process of reducing your near-term tax burden by selling assets that have lost value in the past year. These losses can be used to offset capital gains in other investments, or to reduce your taxable income. While using losses to offset income is capped at $3,000 per year, losses in one year can be carried forward indefinitely to offset income in future years. You will have to pay the tax in the future but TLH puts more money in your pocket now that can be invested to generate returns which can compound for you in the meantime until you choose to sell the investment and face capital gains taxes at that time.

Many advisers offer tax-loss harvesting, but if they are using funds (such as ETFs or mutual funds), the opportunity to generate this advantage is limited. Our approach is to offer TLH at the individual equities level which results in more opportunities for tax optimization. We can do this because OpenInvest’s technology bypasses fund managers and gives you direct ownership of the underlying companies.

Wealthfront, who offers this feature only for accounts with more than $100,000, estimates that this approach can generate an average of 2.03% additional gains per year. However, because “tax alpha” is so variable (e.g. Wealthfront picks very specific years from which to present this data) we are more conservative in our claims – TLH opportunities are not always available or successful.

Though not as critical as keeping fees low, holding a diversified portfolio or selecting an appropriate risk tolerance, TLH is an important consideration in selecting an investment advisor and it can have a significant impact on your long-term performance.

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