Do you avoid investing like the plague? Maybe you read too much conflicting information about investing and thus never even got started. Or maybe you invested some money and lost a ton when the market collapsed, decided never again and haven’t looked back. Or maybe you do want to invest but you don’t know where to start. If any of these sounds like you, I have a solution for you. It’s called Betterment.
Betterment is a “robo advisor” (more on that later) that makes investing simple and easy for you. If you have never heard of Betterment, you are in luck because I am going to tell you all about them today and how they can help you be a better investor. I know this first hand because I’ve been using them for a few years now and am amazed at all they have to offer.
What Is A Robo Advisor?
Before I tell you all the goodness that is Betterment, I need to explain what the term robo advisor means. In the past, when you wanted to invest, you either picked the investments yourself (good luck with that!) or you hired someone to pick them for you and you paid them a fee. The problem with the second option is that most advisors won’t even talk to you unless you have $250,000 or more to invest. Umm, that disqualifies like 90% of the US!
A robo advisor is like an advisor with the exception that it is powered by technology and it doesn’t matter how much (or little) you have to invest. You answer some questions about your risk tolerance, your goals, your age, etc. and these robo advisors crunch the numbers to create a portfolio just for you.
Before you get all nervous about how they come up with this portfolio, know they base it off of modern portfolio theory and the efficient market hypothesis. You can click on those links if you have trouble falling asleep one night, but just know that they are the foundation of investing. In other words, the portfolio they create for you is solid.
What is Betterment?
Now we can get back to talking about Betterment specifically. They started in 2010 and took off like a firecracker. Today they have over $3 billion assets under management (meaning a lot of people use them as their investment advisor) and are continuing to grow.
They work by having you answer some questions (as I mentioned above) and then you set up an automatic transfer from your checking account for a certain dollar amount each month. Betterment invests this money in your portfolio and you sit back and watch The Walking Dead. Seriously. Once you open your account, you are done.
What Are The Nuts and Bolts?
The portfolio Betterment creates for you has underlying ETFs as the investments. No matter what portfolio Betterment creates for you, it will be some mix of the 13 ETFs they offer. Don’t think that this means it doesn’t matter what portfolio you are in, because it does matter. For example, if you are in a 100% stock portfolio, you won’t invest in any of the bond ETFs. So while everyone’s portfolio will always hold some combination of these ETFs, the combination won’t be the same. Here are the ETFs and links to each so you can learn more:
- Vanguard U.S. Total Stock Market Index ETF (VTI)
- Vanguard US Large-Cap Value Index ETF (VTV)
- Vanguard US Mid-Cap Value Index ETF (VOE)
- Vanguard US Small-Cap Value Index ETF (VBR)
- Vanguard FTSE Developed Market Index ETF (VEA)
- Vanguard FTSE Emerging Index ETF (VWO)
- Shares Short-Term Treasury Bond Index ETF (SHV)
- Vanguard Short-term Inflation-Protected Treasury Bond Index ETF (VTIP)
- Vanguard US Total Bond Market Index ETF (BND) (IRA accounts)
- iShares National AMT-Free Muni Bond Index ETF (MUB) (Taxable accounts)
- iShares Corporate Bond Index ETF (LQD)
- Vanguard Total International Bond Index ETF (BNDX)
- Vanguard Emerging Markets Government Bond Index ETF (VWOB)
In addition to investing your money for you each month, Betterment does a few other things as well. Here is the list of these great services:
- Tax Loss Harvesting: This is when you sell some holdings that have lost money to offset any gains you might have realized from other holdings. On the surface it sounds weird to sell when you lost money, but doing this helps you lower your taxes (and we all hate taxes).
- Rebalancing: Along the same lines of tax loss harvesting, rebalancing is selling some holdings to get you back in line with your portfolio goals. For example, if you invested in an 80% stock, 20% bond portfolio and now through market fluctuations have 90% stocks and 10% bonds, your portfolio is out of whack. You are taking on too much risk. Betterment will sell 10% of your stock holdings and buy bonds with that money. Doing this keeps you on track with your goals.
- Free Dividend Reinvestment: When your investments earn a dividend, Betterment will reinvest them back into your holdings free of charge.
- RetireGuide: This tool is really cool. Betterment will look at your account balance and project out how much money you can safely withdraw each month when you do retire so that you never run out of money. It is great to see this when you are 15-20 years away from retirement because it will help you to really see how much you need to keep saving.
You might think that these services aren’t that cool or important. But they are. When I worked for a high net worth financial planner (you needed at least $2 million to invest with us), we provided these same tools to our clients. And we charged them an arm and a leg for it.